Wrestling Is Profitable Entertainment
It’s no secret that society is becoming increasingly polarized. This is true in politics, social issues, and even entertainment. For some, wrestling, not the Olympic sport-style wrestling, is a popular pastime. For others, it has no appeal and some even question why anyone would watch it.
Those same opinions can apply to any entertainment. Twilight movies, popular shows on HBO or any other source of entertainment can split audiences. But, few offer a pure pay trade in the stock market like wrestling does.
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WWE Soars on Hopes for Raw and Smackdown
Shares of World Wrestling Entertainment, Inc. (NYSE: WWE) have been moving up on news that the company could soon sign lucrative new TV deals for its ‘”Raw” and “Smackdown” shows.
NBCUniversal currently airs both shows on its USA Network. The Hollywood Reporter (THR) indicate that the network wants to renew “Raw” once the contract to air it expires later this year, but it will not renew “Smackdown.”
Both shows enjoy huge ratings. But, it might simply become too expensive for the USA Network to keep both shows. NBCUniversal might need to pay three times what it shelled out for “Raw” when it last struck a deal with WWE in 2014, according to THR.
The 2014 agreement was rumored to be worth $200 million, an increase of more than $90 million from the prior TV deal.
Fox is rumored to be interested in bidding for “Smackdown” and that set off a frenzy among traders.
The stock was already moving higher on solid sales and earnings and big crowds for last month’s Wrestlemania and The Greatest Royal Rumble in Saudi Arabia, a potentially new market.
More Than Rumors
WWE co-president George Barrios, speaking at a JPMorgan media conference earlier this month, said the WWE was open to two different networks airing “Raw” and “Smackdown.”
In a response to a question about the status of the rights for “Raw” and “Smackdown,” Barrios said it would not be an issue to split the shows between two networks, adding that WWE was pretty good at promoting all of its events on various platforms.
He said a decision about what’s next for both shows should be announced in the coming months.
Barrios added that he’d also be happy to do more with Facebook and other social media networks. WWE recently debuted a program called Mixed Match Challenge that aired on the Facebook Watch video-on-demand service.
This all adds to the long term appeal of the stock which has been a top performer for more than a decade.
A Trade for Short Term Bulls
As with the ownership of any stock, buying WWE 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 WWE
For WWE, the June 15 options allow a trader to gain exposure to the stock.
A June 15 $55 call option can be bought for about $0.85 and the June 15 $60 call could be sold for about $0.15. This trade would cost $0.70 to open, or $70 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 $70.
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 WWE the maximum gain is $4.30 ($60 – $55 = $5.00; $5.00 – $0.70 = $4.30). This represents $60 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $70 to open this trade.
That is a potential gain of about 16% 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.