Although we are still concerned about the market being over-extended, the good news about vaccine development has made us a lot more interested in positions like Disney (NYSE:DIS).
We have been trading DIS over the past year anytime it looks undervalued, and although the stock has been rising since reporting earnings, we think the prospects for more free travel in the short term have opened some additional upside.
With that in mind, we think a put write is the best way to trade the situation.
Offsetting Retail and Travel Challenges
DIS is a difficult company to talk about.
Is it a media company? Yes.
Is it a travel stock? Yes.
Does it make money on retail? Yes.
DIS has its fingers in many pies, and that means it is affected by trends across the market.
It also means it can be more resilient to those trends.
The company posted a loss in November, but its losses per share were smaller than expected.
From a fundamental perspective, DIS’s cash flow has experienced the same issues most retail companies have, but the media side of the business has helped offset much of the damage.
In the U.S., theme parks have been struggling because of the pandemic. Things were improving abroad for Disney, but its parks in both Hong Kong and Paris had to close again. The reclosures could be a sign of things to come as the Orange County Register writes:
The on-again, off-again operations of Hong Kong Disneyland and Disneyland Paris could forecast future frustrations for Disneyland and its die-hard fans once California theme parks are allowed to reopen under state guidelines.
The stop-start restrictions seen at Disney’s Asia and European theme parks could become the norm for Disneyland and Disney California Adventure as well once the Anaheim theme parks eventually reopen.
For a company that makes a lot of money from theme parks – 41.3% of DIS’s revenue was from its Parks, Experiences and Consumer Products segment in 2019 – this flip-flopping could be a problem.
Though Disney California Adventure is partially open, Disney’s California parks aren’t expected to return to normal operations until next summer.
But fortunately, Disney+ has come to the rescue.
Though the company’s retail and travel branches are struggling, its direct-to-consumer and media network segments are doing well. The company has more than 73 million paid subscribers to its streaming service Disney+ as of the end of the last quarter.
This has put DIS in a much more defensive position than other firms connected to the retail sector, which should work in traders’ favor even if the market remains a little wishy-washy.
Why sell a put write then? Why not buy the stock instead?
To answer that question, we need to look at the stock’s chart for a better idea of its technical situation.
Looking for Support (and Watching for Resistance)
From a technical point of view, DIS is in a strong uptrend, but we are mildly concerned about long-term resistance emerging near $152 per share.
As you can see on the daily chart below, the stock struggled at that level in late 2019, before the pandemic caused a market-wide crash.
Daily Chart of Disney (DIS) Since December 2019 – Chart Source: TradingView
We don’t think this increases the risk of the stock dropping, but it means selling puts to maximize your income is the right move.
Without any big announcements to keep the stock’s momentum up, DIS could lose steam and start to fall. We’ve already seen the positive effects of positive vaccine trials and a decent earnings report. Now we’re waiting for a strong retail showing and vaccine distribution plans.
While we’re waiting, there is a lower probability that the stock will rally beyond the $152 level this month. Selling a put means we don’t need the stock to rise though. We just need it to stay above our strike price.
Daily Chart of Disney (DIS) Since August 2020 – Chart Source: TradingView
As we looked at the option prices, we think playing this a little more conservatively than we usually do is the right move. Premiums are inflated in general, and the $144 puts, which line up nicely with potential support for DIS, are unusually elevated.
That works in our favor, and this gives us plenty of distance from the stock’s current price to reduce the risk of the puts being exercised.
For expirations, we’d recommend looking beyond the holidays. Just don’t drift into mid-January. The later your expiration, the more likely it is that DIS will make a big move. That increases your chances of being put the stock.
On the date of publication, John Jagerson & Wade Hansen did not hold (either directly or indirectly) any positions in the securities mentioned in this article.
John Jagerson & Wade Hansen are just two guys with a passion for helping investors gain confidence — and make bigger profits with options. In just 15 months, John & Wade achieved an amazing feat: 100 straight winners — making money on every single trade. If that sounds like a good strategy, go here to find out how they did it.