Walt Disney Co (DIS) Stock Is a Falling Knife. Catch It!

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Equity markets are at all-time highs which makes it difficult to commit long most stocks. But there are hidden gems and Walt Disney Co (NYSE:DIS) is one of them.

Walt Disney Co (DIS) Stock Is a Falling Knife. Catch It!

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Disney stock peaked in April and since then has corrected over 10%. There were no fundamental changes that caused the sell off. Sometimes Wall Street falls in and out of love with stocks for no particular reason. This is especially true for even the “House of Mouse.”

DIS stock is not expense from a price-earnings perspective and it pays a nice dividend to boot. Its movies almost never disappoint. Its assets have global brand recognition, so there is little to hate in DIS. Yet traders embark on selling sprees and therein lies the opportunity to sell premium for income.

Technically, there is some worry. DIS has been setting lower highs and knocking on a floorboard. If that board breaks, we could retest the century level. Losing $100 per share, a psychologically important level, could spark another wave of selling.

If DIS stock falls another 10%, I am willing and able to own the shares. Today, I will use this thesis to create income from thin air. The trick is to find support levels that are likely to hold in case momentum sellers continue pressing the DIS short trade.

The Bet: Sell the DIS Sept naked $95 put and collect 80 cents per contract to open. This is a bullish trade which has a 90% theoretical certainty that I would retain my premium for maximum gains. But if price falls below it I will own the shares and suffer losses below $94.20.

I won’t sell opposing risk for balance. With a 9% price buffer I am confident that I will be able to manage my risk against price gyrations. But I will offer an alternative trade which has more limited risk. Selling naked puts is not suitable for everyone.

The Alternative Trade: Sell the DIS Sept $97.50/$95 credit put spread. Here I have about the same chances of success but with more limited risk. Yet, the reward would be a 14% yield which sounds more attractive than risking $104.65 to buy DIS. Buying the stock here leaves no room for error, and then I need to hope for a 14% rally just to match the performance of the spread.

Selling options is risky, especially with Disney’s earnings slated for August. That said, only risk what you are willing to lose.

Learn how to generate income from options here. 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 on Twitter at @racernic and stocktwits at @racernic.

Nicolas Chahine is the managing director of SellSpreads.com.


Article printed from InvestorPlace Media, https://investorplace.com/2017/06/walt-disney-co-dis-stock-is-a-falling-knife-catch-it/.

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