Disney’s Power Moves Sets Up a Great Short Term Trade

image1We all know that the entertainment landscape is evolving faster than anyone can keep up.

The idea that we all used to go down to Blockbuster to pick up a few movies for the weekend seems archaic now. And for millions of people around the world, the idea of paying hundreds for cable or satellite TV is starting to feel that way too.

In such a shifting environment, it’s not always easy to pick the winners from the losers. But after a monster of a year so far, one company does have a clear head start on whatever is happening.

The Walt Disney Company (DIS) has been incredibly active – buying up companies, spinning off others and launching huge, brand-new platforms to sell its hoard of content. So, it shouldn’t come as a surprise, it has a lot of heads turning.

Of course, this is nothing new for Disney. It has been gobbling up media companies and copyrights for years. Three of the most prominent have been Lucasfilm (Star Wars), Pixar and Marvel. Just these three entities have produced record-smashing revenues at the box office and in merchandising (something Disney knows very well) for the company.

But there’s so much more to Disney’s story. This year, it has marked itself to be dominant in television too. It has, to be fair, been in this market for a long time, with its ABC and ESPN brands. But now, it’s making even bigger moves.

In March, the company closed its deal to buy out 21st Century Fox – which has its own huge list of properties in both movie and television. That massive $71.3 billion deal is in the books. Now, Disney is moving onto phase two: selling off assets it acquired that it doesn’t really want – like region sports channels.

This streamlining process will take some time. But just this week, it was announced that the company already accepted one deal worth $10 billion for its sports line up to Sinclair – another media giant, but one for another day.

Phase three is already announced. The launch of Disney+ is massive and game changing. This new service will provide content on-demand to compete directly with Netflix and Amazon’s Prime Video. And already, the company is undercutting its competition and providing potentially much more content in the process.

For those older streaming services – ones who have only recently ventured into content creation themselves – this is a scary prospect. It gets worse for them. Along with all of the other enormous amounts of assets Disney received from the Fox deal, it also gained a majority stake in Hulu, Netflix’s former top competitor. There’s even talk of Disney buying out Comcast to gain complete ownership.

Basically, this means that a decades-old media giant now owns many of the world’s largest media franchises and assets and a soon-to-release platform it will control to sell them.

For an industry that has always been somewhat fractured – at least one that had several semi-equally-sized companies competing – media is starting to look like a monopoly.

Now, back to what all of this means to investors, this has been a boon for Disney owners. Just since its pricing and launch day announcement for Disney+ last month, shares have shot up as much as 20%:

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While this has been a good time to be a Disney shareholder, this could be just the start. You see that little retracement over the last week? That could be a set up for another rally.

Next week, the company announces its first quarter earnings. This will include results from the likes of its blockbuster hit Avengers: Endgame and more details for its Disney+ plans, set to launch later this year.

This event will surely drive even more positive attention for the company. Another rally wouldn’t be off the table. In fact, with its current handling of its new Fox assets – integrations and spinoffs – this could be an even bigger one.

Of course, smart investors always act with some caution. This situation is no different. And it should be treated as a likelihood rather than an inevitability.

Fortunately, there’s a great strategy to take advantage of an expected rally without needing to buy up shares of Disney at all.

A Strategy For Short Term Bulls

A bull call spread is a type of options trade that involves buying a call on a stock you believe will go up and selling a second call to help offset both cost and risk.

The most useful way to use this strategy is to buy a call option with a strike price close to the current price of the stock you believe will jump in price. Then, you sell one with a strike near the target price you believe the underlying stock will head to.

Since the second call option – the one sold through this strategy – has a higher strike price, it won’t offset the full cost of the trade. But it certainly reduces both the amount you have at risk and the price tag to get into the overall trade itself (which are the same amount).

You can see how this trade looks here.

Source: The Options Industry Council

As you can see, in exchange for reducing your risk, the second call does cap the profit potential. But unless you believe a stock is set to double overnight, that trade off is often worth it. For Disney, right now, it is.

Let’s look at a specific example to show you why…

A Specific Trade For DIS Ahead of Earnings

Right now, a trader looking to use this strategy could buy May 17 $134 calls for $2.98 per share and sell May 17 $139 calls for $1.13 per share for a net debit of $1.85 per share. Since each represent 100 shares of DIS, that’s a total cost of $185.

That’s also the total this trader would have at risk here. But the only way he’d lose it is if shares of Disney somehow collapse after next week’s earnings. As noted, the opposite is much more likely.

If a rally occurs on the back of this event, the profit potential is well worth that risk. To find exactly how much the trader would stand to gain, take the difference in strike prices ($139 – $134 = $5), and subtract the entry cost ($5 – $1.85 = $3.15). On 100 shares, that’s a potential return of $315.

Think about that, despite it being already likely that Disney heads upwards next week, this trade works out to a 170% return on the amount at risk. Not many people are looking to do a quarter so well with Disney… even if its shares shoot up as expected.

— The Option Specialist

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About the Author: The Option Specialist