Walt Disney Co (NYSE:DIS) stock fell this morning, but for the wrong reason. Yesterday, the judge finally made its decision on the long Saga of the AT&T Inc. (NYSE:T) and Time Warner Inc (NYSE:TWX) merger.
They approved the merger without any restrictions. The repercussions of the decision are reverberating throughout the entire investing community. This gives the green light for other companies to pursue mega-mergers.
This should be great news for DIS who is trying to buy Twenty-First Century Fox, Inc. (NASDAQ:FOXA). Instead, the stock is falling on worries that this will likely invite competing bids. Specifically, Comcast Corporation (NASDAQ:CMCSA) is now expected to announce their bid to buy Fox. So there is likely a fierce bidding war looming for DIS.
They say that content is king and the FOX deal would bring great content to the winner. But the concern is that the winner will end up paying too much. Strategically, the deal will help the winner on an ongoing basis. So it’s a matter of withstanding short-term pain during the assimilation process.
DIS management is a proven winner that has some of the best assets on the planet. Their movies are usually incredibly successful and their theme parks are overcapacity. Every person alive knows the house of mouse. Their assets are recognizable globally so it will be very hard to fail in the long run. The investor fears today are short-sighted.
DIS recently announced their venture into streaming content to compete with Netflix, Inc. (NASDAQ:NFLX). I believe that every kid on the planet will demand it, and parents who have access to mobile devices will comply with their kids’ requests. Meaning it will be an instant hit.
NFLX laid the groundwork for it as we are all now fans of consuming content online. DIS already has the material so it will be a matter of implementing the pipeline for its delivery. The FOX deal will add to the content offering to further widen the spectrum of viewership.
Coming into this decision, Disney stock was already struggling down 6% year-to-date. But there is good news as it has held a long-term pivot point that has been support since early 2015. So in the long run, DIS will recover from this morning’s dip in the stock. I use options to bet against proven support and to profit from others’ unrealistic fears. This will essentially create income with no money out of my pocket. I merely need support to hold through 2018.
Two DIS Trades
The Trade: Sell DIS JAN 2019 $87.50 naked put. This is a bullish trade where I collect $1.20 to open. Here I have a 85% theoretical chance of success. But if price falls below my strike, then I accrue losses below $86.10.
Those who want to mitigate the risk that comes with selling naked puts can sell spreads instead.
The Alternate Trade: Sell the DIS JAN 2019 $87.50/$85 credit put spread where I have about the same odds of winning but with much smaller risk. Yet the spread would yield 12% if successful.
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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.