Wall street has a history of falling in and out of love with Walt Disney Co (NYSE:DIS) stock. Consequently, DIS stock behaves like a momentum stock without a fundamental profile as strong as Disney’s.
Disney is a global brand with tremendous assets yet it doesn’t get the respect it deserves. If it did, traders would not sell DIS stock down 15% in a quarter, especially when it delivers decent results. They hit the sell button as if its fundamentals were falling off a cliff. I don’t agree with that rhetoric.
Fundamentally, DIS’s valuation is on the low side versus its traditional competitors and definitely cheaper than the new streaming alternatives like Netflix, Inc. (NASDAQ:NFLX) for example. DIS stock trades at 18X earnings, which is low enough as to not be bloated.
There is some worry over future spending to kick start its streaming business. Considering Disney’s fan base and library of shows, it should simply be an infrastructure project with little strategical risk. As they say: If Disney builds it, they will come.
Click to Enlarge In addition, analyst expectations are too modest. DIS has too many experts rating it as a “sell” or “hold.” This makes the potential of surprise upgrade headlines more likely than the downgrades. This makes my bullish bet here a countertrend bet — those tend to yield great results when correct.
According to the analysts who cover Disney stock, the low end of the range is at $90. This is important because at that level I am more than willing to own it. This is a critical assumption in the way I trade DIS today.
Regardless of what the “expert analysts” think of DIS, such a quality company is an easy falling knife to catch. I have no problem going long on dips from irrational fears. Only this time it has great upside potential, too.
The Bet: Sell DIS stock Dec $90 naked put and collect 90 cents per contract to open. This is a bullish trade where I have a 12% buffer from the current price. This means that I have a 90% theoretical odds of success. But if it falls below $90 then I own the shares and accrue losses below $89.10.
To mitigate the margin requirement of selling naked puts, traders can sell spreads instead.
The Alternate Bet: Sell DIS stock Dec $92.50/$90 credit put spread where my risk is capped. Yet if the spread wins it delivers 18% in yield.
I can make my bullish bet even juicier by adding an optional upside target as well.
The Twist (Optional): Buy DIS stock Oct $105/$110 debit call spread where if price rallies through it I can triple my money. But as long as DIS stock stays above my sold puts, any premium I collect from closing the debit call spread would be pure profit.
Investing in the stock market never is a guarantee. That’s why you should never bet more than you can afford 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.
