Final week in Colorado.

weigh-in:  201.8 (1.2)

music selection:  “In The Middle Of The Night” — Within Temptation

I am in the process of exiting my covered call positions and raising cash.  I want to be positioned to take advantaged of distressed debt opportunities when the credit cycle inevitably rolls over.  To that end, I let BX expire in the money over the weekend and be called away.  I had to close my short Iron Condor in DAL early because shares rallied quite strongly.  I booked a 812 dollar loss on the spread.

One of my goals is to convert my covered call portfolio over to a calendar spread portfolio.  This requires less capital deployed and let me hunt in much easier ground as now I don’t need to find stocks that go up in a short period of time.  I’m now looking for companies that will trade more or less flat for 40 to 47 days.  To that end, I’m focusing on companies with 50 billion or more in market cap, rising sales, and low Beta.  There aren’t many companies in this category but the ones that are tend to be very stable and even recession resistant.

This week’s trade is a calendar spread in Disney (DIS).  I sold 5 contracts of DIS190830P00145000 for 4.354 a share.  At the same time (using a combo order), I bought 5 contracts of DIS191018P00145000 for 5.654 a share.  The cost of the spread is 1.30 per share and will be in force between 40 and 47 days.  The long puts should be worth about 4.20 a share at the time the short contract expire, meaning that if shares trade flat, I will more than triple my money on the spread.  Most likely, I will close a few days before the short leg expiry to ensure I do not get assigned early and suffer additional commissions to clean up the trade.

My research has so far turned up 21 companies that I think are very strong candidates for buying calendar spreads and I expect to do quite well while I wait for the credit cycle to roll over.

Devour your prey raptors!

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Calendar Spread Disney (DIS)

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5 thoughts on “Calendar Spread Disney (DIS)

  • July 15, 2019 at 3:35 pm
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    Correct me if I’m wrong, but I understand low volatility moments like now are good times to do calendar spreads because if vol rises it will cause a bigger increase on the longer-duration option than the shorter.

    Reply
    • July 15, 2019 at 4:35 pm
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      This is true but a broad spike in volatility probably move the underlying price more than the benefit of Vega. The main theme is you want the underlying to stay put until you exit the spread.

      Reply
      • July 16, 2019 at 10:12 pm
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        I might be inclined to bet against stocks staying flat a few months after the yield curve inversions. There’s neutral short and there’s neutral long (e.g. long vs short condors, straddles, and strangles).

        If earnings are hit by tariff related disruptions we could crash, or if a trade deal is miraculously signed right before election season while the Fed has been head-faked into cutting rates, we could experience a melt-up. One or the other outcome (or both) will occur.

        Reply
        • July 17, 2019 at 5:00 pm
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          The uncertainty is why I’m focusing on low Beta stocks. Whatever happens, they will (probably) move less than the broad market. It’s the best I can do to cope with randomness.

          Reply
          • July 18, 2019 at 4:19 pm
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            I know I just provided the scenarios above justifying a prediction of increasing volatility, but in truth we should be just as terrified of our own predictions regarding volatility directions as we are of our predictions about stock price movements.

            Perhaps the thing to do now so that you can remain somewhat directionally and volatility neutral while still generating income is to set up a combo of bullish and bearish *defined-risk* credit positions that can offset one another. Some of these positions would harvest time decay while others would be lotto tickets in the event of higher vol. There won’t be any home runs with this approach but then again again all you have to do is earn about 6% per year to avoid drawing down your accounts during a recession or suffering losses during a melt-up.

            This would be a more portfolio-wide strategy than hunting for single orders, but now might be just the time.

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