Not too long ago, Netflix (NASDAQ:NFLX) drove a shift in content consumption behavior that will last for decades to come. They have the first mover advantage. But there are several media companies hot on their heels and Disney (NYSE:DIS) is one of them.
Disney is a proven global media company with incredible assets. Every person on the planet knows the house of mouse. So they have a good opportunity to bite into NFLX’s gigantic piece of the streaming pie.
With the advent of the smartphone and higher-speed internet has come the rise of streaming. We have been cutting the cord at an alarming pace. So far, this has been a problem for DIS stock but therein lies the long-term opportunity.
DIS announced their intentions to shift their model to adapt to this streaming-dominated world. They have since put their money where their mouths are. They chased major acquisitions, namely Twenty-First Century Fox (NASDAQ:FOXA). And more directly to competing with NFLX, they announced their divestiture from NFLX to build their own streaming service.
DIS already has awesome content so all they have to do is build the pipes to deliver it. The world will subscribe because every kid will demand that they have access to DIS content. Parents will oblige.
Last night, DIS management reported earnings and the stock is under some pressure. They missed a few metrics but CEO Bob Iger delivered a confident message during the conference call to signal that they are confident of their plans going forward.
There will be hiccups along the way. This past quarter, they had costs issues in films and the launching ESPN+, but overall there were no major concerns. Looking ahead, the next few quarters will be messy since they will have acquisitions to absorb and a platform to build.
Coming into the earnings, Disney stock had run up too far too fast. The breakout was also technical on the monthly chart so the bulls were at a disadvantage. Without definitive good news from the earnings headline, it is normal that investors book some short term profits. Long term, the company is still on track for continued success.
The road to Netflix-level competition won’t be easy but it sounds like management knows it. They halted buybacks so they can stay in a good cash position and to retain better rating. This could be a sign that they plan on future cash raises.
DIS Stock Trade
So today’s setup is a pair trade. The first buys into the hopium for higher prices. The second fully finances that prospect.
The Upside Bet: Buy DIS JUN 2019 $120/$125 call spread for $1.90 to open. This is a chance for me to essentially double my money if price rises through my strikes through middle of next year.
The Bank: Sell DIS JAN 2019 $100 naked put and collect $1.40 to open. This too is a bullish trade where I have a 85% theoretical chance of success.
I am not required to hold either trades through expiration so I can close either at any time for partial gains or losses.
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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.