If you believe in “big” miracles, then it could be time to buy Walt Disney Co (NYSE:DIS). But villains off and on the DIS stock chart suggest waiting for a bearish narrative to continue to unfold before buying — unless you’re purchasing an out-of-the-money long put butterfly spread. Let me explain.
DIS stock has not been a walk in the (amusement) park for its investors the last couple years, and the growing trend of cable-cutting on the part of consumers has been the heaviest albatross for Disney. As a result, the entertainment giant has been grappling with new avenues to distribute and market content ranging from Marvel, Pixar, Lucasfilm, Disney’s own vast film library and of course cable television Goliath ESPN.
Bottom line, those challenges aren’t going away tomorrow and there’s not going to be an episodic happy ending for November’s earnings report regarding how this formative transition will ultimately pan out for DIS stock.
On that note and as InvestorPlace’s James Brumley wrote recently, Disney’s “recently-announced but not-yet-launched online-streaming video services have their work cut out for them.” I tend to agree, it’s going to be challenge, but ultimately I don’t doubt Disney will eventually figure it out.
DIS Stock Weekly Chart
Click to Enlarge
No doubt the 200-week simple moving average currently being tested in DIS stock is a “biggie” and investors have been toiling with the trendline for about two full months. But will the latest in a long series of moving average failures over the past couple months, really be up to the task of delivering for bullish DIS stock investors?
I’m not expecting any miracles and believe Disney shares are likely to fail for a couple more concerning reasons.
First and since cratering in early August and failing to hold mid-level channel support, a lengthy and mostly healthy corrective base up to that point, has taken a turn for the worse in shares of Disney. Further, the price action has led to the development of a bearish continuation flag with the channel line acting as resistance.
With stochastics weakening, I’m anticipating a breakdown of the flag in DIS stock and an eventual challenge of $85 to $90 based on the two significant lows within Disney’s two-plus-year-old corrective pattern.
DIS Stock Bear-to-Bull Butterfly
In seeing near-term weakness likely triggered by earnings, but drawn to the idea of buying DIS stock at a discount if shares revisit the lows of the last couple years, I favor approaching the name with a long Dec $95/$90/$85 put butterfly.
Priced for 80 cents with shares at $97.78, the combination reduces and contains risk to less than 1% of DIS stock. The upper boundary of the bearish profit range from $85.80 to $94.20 is less than 3% away. There’s also a max payout of $4.20 at $90 on expiration that’s aligned with the top of our estimated price target range.
Lastly, if Disney fails to cooperate and the trader needs to re-evaluate as the spread collapses in value, the modest cost acts as a fairly inexpensive insurance policy with which to make a more informed decision to buy or not buy stock.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!
