Walt Disney Co (NYSE:DIS) reported earnings last night and the reaction was it insane. First the stock fell 5% in after-hours trading, only to spring right back to +2%. Now it is hovering around 3%. This is impressive since the general markets are in a funk over the political headlines on corporate tax laws.
DIS stock started the year well but then faltered in April. Traders have had several issues with its fundamentals on many fronts.
Often enough, traders overreact in either direction, and this is no different. They will sell it too low then correct a bit to settle somewhere in the middle until the next meme.
Coming into this earnings report, DIS stock had recently a bout of exciting recent moments. It fell about 7% on the last earnings then another 5% a few weeks later on a Netflix, Inc (NASDAQ:NFLX)-related headline.
This week it recovered half already. Now it can attempt at regaining the rest.
I was lucky enough to book profits just before it plunged to $96 per share on Sept. 7. Today I want to place another bullish trade for the next few months, knowing I have profits in hand.
Click to Enlarge Instead of chasing the rally, I want to sell downside risk against the most recent test of support. Then I will let time do the work for me. If the price stays above my risk then I would have created income out of thin air.
DIS stock is a quality company with extremely valuable global assets. No one on the planet doesn’t know the House of Mouse. Cord cutting risk or not, their venues and fans will assure its success for decades to come.
Furthermore, while their recent challenge to NFLX caused worry to some, I say it’s a great idea. Content is king and they are kings of content. Their movies perform incredibly well. And to launch their own streaming venue is only a matter of operation delivery methods. Kids WILL drive their parents to pay the fee for the DIS stream when it goes live. What markets fear as an expensive proposition, I see as opportunity for the long term. At least they are adapting to the new normal before someone else eats their proverbial lunch.
Fundamentally, DIS is not expensive with an 18.7 price-to-earnings ratio and a price-to-book under 4. I am confident that owning shared at a discount from here won’t be a mistake — and therein lies my strategy. I sell risk below those levels where I deem DIS a bargain.
Technically, the Disney price action is tricky. But I am willing to overlook the complications by the way the bulls rejected the lows. It was an emphatic buy signal and on a day where the markets were falling out of bed.
Even after this rally, Disney stock is still trading below the average Wall Street price target. Most Analysts are on hold with their ratings of it. So I simply rely on my own evaluation and the price action at hand. I ignore the experts but leave enough room for error to account a few more potential tizzies that politicians could cause.
DIS Stock Trade Idea
The Trade: Sell the DIS Jan 2018 $96 puts and collect $1 to open. This is a bullish trade where I have an 80% theoretical odds of winning. Otherwise I own the shares at a discount and would amass losses below $95.
Selling naked puts carries big risk. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the DIS Jan 2018 $95/$92.50 bull put spread where I have about the same odds of success. Then the spread would deliver 20% yield on risk.
Ultimately, regardless of how careful I am, investing in stocks is fraught with danger, so I never risk more than I am willing to lose
Get my newsletter for free here. 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.
