This is the one trade that has not performed well… and that’s an understatement. It’s still manageable, but earnings are up on deck and I’m not comfortable having that much exposure on in the stock.
It’s time to put on a “sanity hedge.” This is a technique where I buy some puts that are one month further out in time. The reason I go further out in time is that the time decay doesn’t really matter and I still have the time decay in the original trade.
Here’s the trade:
Buy to open DIS Apr 85 Put @2.70 or lower
Sizing is crucial here.
Figure out your total net delta on your spreads, and buy enough puts to cut your delta by half or 2/3ds.
The delta of the option is -33, so if you have 300 delta then you can buy 5 puts to cut your size down. If you have only 100 delta then you can buy two to cut your directional exposure by 60%.
This is a “sanity” hedge, meaning we’re not going to stay in the trade for very long.
Here’s how we’ll execute on it.
IF DIS gaps down big, then we’ll close out the puts for a profit and use those profits to pay for the cost of the roll on the spreads.
If DIS gaps up big, then we’ll scale out of some of the put spreads with intent to re-add on a pullback. And if the stock pulls back after earnings, that’s when you close out the sanity hedge.
This trade may require one more roll out to April, but that roll won’t be needed for a little while longer.