Disney: 2 Trades In Anticipation Of Stock Upswing

Source: InvestingPro

In other words, fundamental valuation suggests shares could increase by around 30%.

At present, Disney’s P/B and P/S ratios are 1.9x and 2.3x, respectively. Comparable metrics for peers stand at 2.2x and 1.8x, respectively.

Our expectation is for DIS stock to build a base between $95 and $105 in the coming weeks. Afterwards, shares could potentially start a new leg up.

Disney bulls who are not concerned about short-term volatility could consider investing now. Their target price would be $126.96, as per the valuation level suggested by quantitative metrics.

Alternatively, investors who expect DIS stock to bounce back in the weeks ahead could consider setting up a bull call spread.

Most option strategies are not suitable for all retail investors. Therefore, the following discussion on DIS stock is offered for educational purposes and not as an actual strategy to be followed by the average retail investor.

Intraday Price At Time Of Writing: $97.70

In a bull call spread, a trader has a long call with a lower strike price and a short call with a higher strike price. Both legs of the trade have the same underlying stock (i.e., Disney) and the same expiration date.

The trader wants DIS stock to increase in price. In a bull call spread, both the potential profit and the potential loss levels are limited. The trade is established for a net cost (or net debit), which represents the maximum loss.

Today’s bull call spread trade involves buying the Sep 16 expiry 100 strike call for $5.90 and selling the 105 strike call for $3.85.

Buying this call spread costs the investor around $2.05, or $205 per contract, which is also the maximum risk for this trade.

We should note that the trader could easily lose this amount if the position is held to expiry and both legs expire worthless, i.e., if the DIS stock price at expiration is below the strike price of the long call (or $100 in our example).

To calculate the maximum potential gain, we can subtract the premium paid from the spread between the two strikes, and multiply the result by 100. In other words: ($5.00 – $2.05) x 100 = $295.

The trader will realize this maximum profit if the Disney stock price is at or above the strike price of the short call (higher strike) at expiration (or $105 in our example).

Finally, we can also calculate the break-even stock price at expiration. In our example, it is $100 + $2.05 = $102.05. In other words, we add the net premium paid to the strike price of the long call, which is the lower strike (or $100 here). Therefore, on the day of expiry, the trader would need Disney shares to close above $102.05 to break even from this trade.

Those traders expecting a gradual price increase in DIS stock toward the strike price of the short call (i.e., $105 here) could consider a bull call trade. Please note that the numbers we have used in the calculations do not include brokerage commission or fees.

Bottom Line

In recent months, Disney stock has come under significant pressure. Yet, the decline has improved the margin of safety for buy-and-hold investors who could consider investing soon. Alternatively, experienced traders could also set up an options trade to benefit from a potential run-up in the price of DIS stock.

***

The current market makes it harder than ever to make the right decisions. Think about the challenges:

• Inflation
• Geopolitical turmoil
• Disruptive technologies
• Interest rate hikes

To handle them, you need good data, effective tools to sort through the data, and insights into what it all means. You need to take emotion out of investing and focus on the fundamentals.

For that, there’s InvestingPro+, with all the professional data and tools you need to make better investing decisions. Learn More »