“It’s always fun to do the impossible” – Walt Disney
Today, May 9, 2022, the Value Investment Fund sold 200 PUTs of The Walt Disney Company. Market price at 11:06 AM was $107.34. The Fund has set the intrinsic value at $116 per share with a ‘Buy’ point of $110, a 5% discount from intrinsic value. On Friday the 6th, the Fund bought 180 shares at $110 each for a total investment of $20,000 including transactions fees. The current options trading matrix is below. For a buy price of $105, current PUTs are selling at $9.80 each. Thus, the Fund will net $8.80 per PUT contract. This totals $1,760 in realized earnings for a strike price of $105 through October 21, 2022 (5 1/2 months).
Since the Fund wants to own this company at $110 per share but doesn’t want to risk a significant exposure, an alternative is to sell PUTs. A PUT is an insurance arrangement for the buyer. A typical buyer owns The Walt Disney Company and wants to ensure that their worse case scenario is selling the stock at $105 no matter how low the price dips. Thus, the buyer will pay money for insurance requiring the seller (in this case the Value Investment Fund) to purchase the stock at this price.
© 2022, David J Hoare MSA. All rights reserved.