- Disney (DIS) stock has cratered more than 40% from its 2021 peak.
- The latest wave of selling came after fellow streaming giant Netflix (NFLX) reported its first subscriber loss in more than a decade.
- Would-be buyers need patience and should use options to elevate the odds of success.
The downturn in Disney (NYSE:DIS) is fast approaching the size of the 2020 pandemic crash. The deep discount has investors circling the wagons and would-be buyers interested in DIS stock. Why? Well, it’s not often you get a chance to buy a marquee name so far from the peak. So that makes the attraction completely understandable.
However, you don’t see fire sales without a fire — and this one is burning bright. That said, if you’re willing to brave the flames with a purchase, at least use options to enhance your odds. I’ll show you how below.
Overall though, with Tuesday morning’s decline, Disney’s stock price has fallen more than 40% from its peak price of $203.02. While short-term traders might not care about this particular stat, long-term investors should. It reveals the severity of the current crisis gripping stock prices and just how much of a discount is now available to those willing to buy with a multi-year time horizon.
Of course, I believe DIS stock will recover; History and optimism demand such a stance. The only question, however, is how much lower it will go in the interim.
Since no one knows the answer, we’re left with two choices: Wait for evidence that a bottom has formed and the trend is moving higher. Or, lob naked puts to give us a modest margin of error and hope we’re close enough to the ultimate bottom. Nonetheless, before diving into the details of the strategy, let’s take a brief look at the forces weighing on DIS stock.
| DIS | Disney | $116.83 |
The Netflix Hangover
As if Disney didn’t have enough to worry about with the bear market ravaging stock prices, Netflix (NASDAQ:NFLX) unveiled a troubling trend when it reported earnings last week — and subscriber loss was the big takeaway. The streaming king was expected to add 2.5 million customers for during the first quarter 2022. Instead, it shed 200,000, marking the first quarterly decline in its subscriber base in more than a decade.
Comparatively, Wall Street doesn’t like it when a growth company stops growing. It makes investors rethink just how much they’re willing to pay for equity in a company whose best days may be behind it. And as the largest player in the streaming space, Netflix casts a large shadow.
In the wake of the report, sellers have been swift to attack Disney and other streaming media companies. Why? Because the overarching narrative is that what’s bad for Netflix is bad for everyone. And that’s certainly the mood of the moment if you look at the price action of the industry.
However, there could be a more positive takeaway.
If the subscribers abandoning Netflix are finding a new home at Disney, then perhaps one’s pain is the other’s gain. That said, we’ll soon find out if there’s any merit to the story, as Disney is slated to report earnings on May 11.
DIS Stock Chart and Trade
Collectively, the Disney price chart leaves little room for optimism. It looks as ugly as you’d expect for any stock that’s been cut in half. Prices are careening lower beneath all significant moving averages, and the recent support break of $130 delivered a swift decline. So now, we’re in no man’s land.
Therefore, time is needed to find the next support zone and for a bottoming pattern to form. I suspect buyers will be shy ahead of the May earnings announcement, not wanting to purchase ahead of what could be a volatile reaction.
So, if you want to cast a line, the smarter way to bottom fish is by selling puts. Think of it as a way to get paid for your willingness to buy shares at a discount to the current price. For instance, let’s say you’d be happy to acquire shares at $105. The following trade will pay you $2 per share to obligate yourself to do so.
The Trade: Sell the May $105 put for $2.
If Disney expires above $105, you’ll pocket $200 per contract. If it sits below $105 at expiration, though, you’ll have to buy shares at an effective price of $103.
On the date of publication, Tyler Craig was long DIS. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
