Fastball Financial

Thus far, we have committed $69,000 of our $100,000 portfolio as follows:

• $10k covered call on Intel (INTC)
• $10k covered call on Microsoft (MSFT)
• $10k covered call on McDonalds (MCD)
• $19k selling puts in Apple (AAPL)
• $20k in iron condor on Walmart (WMT)

So far, all of these trades are playing along nicely.  Because of this, we are adding another trade to tie-up another $20,000 of the portfolio.  This time we are using Disney (DIS) and an Iron Condor to take advantage of heightened volatility stemming from their upcoming earnings announcement on Tuesday. 

With that earnings report, there is risk of a significant move either higher or lower depending upon the results.  However, this trade provides us with 5.8% protection on both the upside and downside.  As long as Disney stays within this 11.6% range, we will make money.

The Trade

An Iron Condor trade has 4 legs:

1. Sell 15 $41 Puts for $0.40
2. Buy 15 $39 Puts for $0.16
3. Sell 15 $45 Calls for $0.28
4. Buy 15 $47 Calls for $0.07

This produces a net $675 income.  We will keep the full $675 if the stock is between $41 and $45 at expiration in two weeks.  This trade will break-even as long as the stock is between $40.50 and $45.50.  Disney closed on Friday at roughly $43.  That gives us a 5.8% cushion on both the downside and the upside.

We are setting aside $20,000 in our portfolio, but the trade itself only requires $2,325 to execute.  Because we bought options at $39 and $47, our max risk of loss is capped at the $2,325.  If we had simply sold the $41 puts and $45 calls, then we could have generated more income, but our risk would be uncapped.  We much prefer to have risked capped whenever possible.

The $675 of income will get us a 29% return on the $2,325 at risk and a 3.4% return in only two weeks on the $20,000 that we are setting aside in the portfolio.

Disclosure: Dave does not currently own DIS.