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The Mouse Roared and Traders Noticed

The Mouse Roared and Traders Noticed

The big news on Wall Street last week was about a large company with a long history. It was a surprise as The Street reported,

“Disney took the wraps off its highly-anticipated streaming video service on Thursday, and investors were giving it rave reviews.

At an investor event on Thursday after the close, Disney (NYSE: DIS) CEO Bob Iger and a host of executives provided plenty of details about Disney+, the latest entrant into the crowded direct-to-consumer streaming space. Shares of Disney moved up on the news.

DIS daily chart

Rounding out Disney’s existing portfolio of direct-to-consumer services — which includes ESPN+ and Hulu, as well as Hotstar in India — Disney+ is a “family-friendly” offering that brings together content from various Disney-owned brands, including National Geographic, Marvel, Pixar, Star Wars, the Disney Channel, as well as The Simpsons and other select programming from Fox.

Disney+ will launch on Nov. 12, 2019 and is priced at $6.99 per month, or $69.99 annually. Kevin Mayer, head of Disney’s direct-to-consumer and international segments, said that Disney “might” offer bundling with ESPN+ and Hulu at a discounted rate.

Disney+ programming, in its first year, will include more than 35 original series, movies or specials, more than 100 recently released movies and more than 400 library titles. It will also include about 7,500 episodes of past series.

By its fifth year, that will increase to more than 10,000 episodes, more than 60 originals, and more than 500 library titles.

At launch, Disney+ subscribers can watch 9 originals, which include a live-action Lady and the Tramp, The Mandalorian, a space opera based on Star Wars, High School Musical The Musical, The Series, and others. Library content will include the entire Pixar library, animated Disney classics, live action films, content from the Marvel universe, National Geographic, Disney Channel and Star Wars, and select programming from Fox with additional content will be added on a continuous basis, Disney said.

In a note this week, Morgan Stanley analyst Benjamin Swinburne forecasted that by 2022, Disney will have 70 million direct-to-consumer subscribers between ESPN+, Hulu and Disney+.”

This could boost the stock in the long term.

DIS weekly chart

A Trade for Short Term Bulls

As with the ownership of any stock, buying DIS 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.

bull call spread

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 priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

A Specific Trade for DIS

Every day, we scan the markets looking for trades with low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For DIS, the May 17 options allow a trader to gain exposure to the stock.

A May 17 $135 call option can be bought for about $1.83 and the May 17 $140 call could be sold for about $0.76. This trade would cost $1.07 to open, or $107 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 $107.

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 DIS the maximum gain is $4.24 ($140 – $135 = $5; $5 – $0.76 = $4.24). This represents $424 per contract since each contract covers 100 shares.

Most brokers will require minimum trading capital equal to the risk on the trade, or $107 to open this trade.

That is a potential gain of about 296% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.