Walt Disney Co (NYSE:DIS) is one of those companies that often falls out of favor with Wall Street. Add to it the uncertainty of earnings and traders become fearful of committing long to it. So therein lies the opportunity.
Today I am willing to bet long on DIS stock through the earnings, but only through selling options to create income out of thin air.
Fundamentally, I can emphatically argue for the value in DIS stock relative to its competitors and in absolute terms. The company owns assets that have global recognition. Its price-to-earnings ratio is under 20, so coming into earnings, there is definite value against which I am willing to risk for profit.
Click to Enlarge No, I am not in favor of buying the stock outright but I am looking to sell puts against support to generate income. This strategy has no out-of-pocket expense. But by selling puts, I commit to buying the shares lower if price goes against me.
Technically, even though it had a recent dip, above $112.50 it could invite momentum buyers to challenge $120 per share. When bulls are able to set higher lows and break out of a descending lower-high trend, they can overshoot much higher.
But the short-term reactions to earnings are binary events, meaning we never know how traders will react to the earnings so this adds an air of gambling more than investing.
That’s why I use options. There I can build a buffer big enough to withstand any short-term dips from possible bad earnings reactions. Even if we had the DIS P&L, we can’t forecast how traders will react.
I come into this trade with profits in hand from another DIS trade that generated income out of thin air. Today I am merely resetting with a longer time frame.
DIS Stock Trade Ideas
The Bet: Sell DIS Dec $95 puts naked and collect $1.40 per contract to open. Here I have a 90% theoretical chance that price will expire above my strike so I can retain my maximum gain. Otherwise, I will suffer losses below $93.60.
The Alternate Bet: Sell DIS Dec $95/$90 spreads, where I have about the same odds of winning but with much smaller overall risk. The spread can deliver a respectable 15% in yield.
Compare this with risking $108 to buy Disney stock at face value then hoping the reaction to earnings is positive. With either of my trades, all I need is for DIS stock to stay above my strike and I win. I am more confident in my thesis when I have a 12% buffer.
Success in equity investing is not guaranteed, so I never bet more than I am 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.
