Hulu Drives This Stock Up
Streaming services are changing the consumer television market. It’s not surprising that technology would disrupt a market. What is surprising is how effectively the upstarts are disrupting the market.
Streaming services can replace cable television or satellite subscription services. But, the traditional model may have sowed the seeds of its demise. Traditional packages included bundles of channels and that was fine, until consumers learned about it.
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When the information became well known, some consumers decided they did not like the model that was required to buy ESPN, for example. The sports channel was generally the most expensive part of the consumer’s package and many did not watch sports programming.
The backlash and perhaps more importantly, the opportunity for savings, allowed competitors to increase their market share. The competition includes Roku and Hulu along with Netflix, Amazon Prime and others.
Discovery Expands Its Reach
Streaming services are working to expand their content to increase the appeal of their services to consumers. This initiative has the potential to benefit traditional content providers including companies like Discovery, Inc. (Nasdaq: DISCA).
DISCA recently signed a multi-year deal with Hulu, bringing five networks to its virtual pay TV service. As Market Watch reported, “Hulu has inked a multi-year deal with Discovery to bring five networks and thousands of on-demand episodes to the streaming service’s live TV lineup, according to a report in Variety.”
It was a difficult negotiation according to the report. “Talks have been going on for over a year, according to the magazine, since before Hulu launched its over-the-top streaming pay TV service, dubbed Hulu With Live TV, in May 2017.”
But, the resulting deal means that the networks “Discovery Channel, TLC, Investigation Discovery, Motor Trend and Animal Planet will come to Hulu With Live TV subscribers in December.
Hulu will also get exclusive subscription streaming rights to episodes of “Deadliest Catch,” “Say Yes to the Dress,” “MythBusters” and “Naked and Afraid,” as well as four scripted series from the Oprah Winfrey Network.
This adds to the existing distribution deal Hulu has with Discovery-owned Scripps Networks Interactive. That deal includes networks HGTV, Food Network and Travel Channel. Hulu With Live TV is currently priced at $40 per month.”
The stock price jumped on the news.
The jump now puts the stock in a position to challenge resistance that formed in 2016 and 2017.
A Trade for Short Term Bulls
As with the ownership of any stock, buying DISCA could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high prices stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.
A Specific Trade for DISCA
For DISCA, the October 19 options allow a trader to gain exposure to the stock.
An October 19 $32.50 call option can be bought for about $0.50 and the October 19 $35 call could be sold for about $0.17. This trade would cost $0.33 to open, or $33 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $33.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in DISCA the maximum gain is $2.17 ($35 – $32.50 = $2.50; $2.50 – $0.33 = $2.17). This represents $217 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $33 to open this trade.
That is a potential gain of more than 500% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.