Disney (NYSE:DIS) has been in competition with Comcast (NASDAQ:CMCSA) over buying assets from Twenty-First Century Fox (NASDAQ:FOXA) for a while. This morning, we learned the final result and Comcast prevailed in the bidding process. Disney stock is rallying on the news … and therein lies an opportunity.
The rally this morning is not so much for the benefit of the outcome, but rather to move past the event, eliminate the distraction and continue trading on Disney stock’s fundamentals and technicals. The House of Mouse has embarked on a journey to launch a competing streaming platform to Netflix (NASDAQ:NFLX).
They do already own great content so it’s only a matter of implementing the delivery platform. This will be an easy task for an accomplished management team like Disney. DIS stock is now free of complications from headlines over the Fox bidding process.
Fundamentally, Disney stock is not expensive. It trades at a price-to-earnings ratio of 16. It does have challenges but nothing that will crippled stock. Even the threat of cord-cutting is abating with the new venues.
The assets that Disney holds will translate well into a streaming subscription. There’s no one on the planet that doesn’t know most of its characters, so it’s just a matter of making them available. Parents will not be able to resist the demand from the children just to name one type of programming.
They already noted low entry costs and the advantage that Disney has over say NFLX is that it’s a profitable company now with a great cash flow to support the new service.
Technically, DIS stock is also exciting. It has been setting higher lows and attempting to breaking a trend line of descending lower highs. And when that happens, usually energy breaks up words.
The stock market is still under threat from headlines over tariff worries and rising rates. So instead of simply buying DIS stock at $111 per share and hoping it rallies, I use options where I mitigate my out-of-pocket risk to create a buffer.
How to Trade Disney Stock Today
This is a pair trade. The first part of it would capture the long-term upside potential, and the second would create income from betting on downside support into 2018.
I come into this trade with profits in pockets from trades I’ve shared before.
The upside move: Buy DIS Jan 2019 120/$125 debit call spread for 85 cents per contract. I profit if the Disney stock price rallies through 2018.
To mitigate my risk, I sell downside risk to lower my out-of-pocket expense.
The bank: Sell DIS June 2019 $92.50 put and collect $1.40 to open. If the price stays above my strike, then I retain its maximum gains. Otherwise, I own DIS shares at a deep discount from here.
Since the net effect of both trades is a credit, then as long as price stays above $92.50 per share, I am a winner. Any premium that I recover from closing the calls would be pure incremental profit.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.
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