Opened New DIS Position

I exited my last Disney (DIS) position almost five years ago when DIS was trading for $31.94.  I was smart to do so since DIS lost more than half of its value within a few quarters after I dumped it.  However, if I had sucked it up and became a buy and hold investor (ick!), I would’ve been rewarded well.  The stock has risen more than 70% since I exited (more than triple since the bottom) and that doesn’t even include the dividends (Oh, ouch!).  I came back to it today, three and half years later than I should have, but with the belief that it has a lot of upside in it still.

The story has been out for a while that Disney is going to make the next three movies in the Star Wars saga.  They plan to make episodes VII, VIII and IX over the next six years.  I should’ve gotten into DIS when I learned that originally, but I didn’t.  The news that triggered my attention today (as if those three movies aren’t enough) is that they are going to have some (not sure how many yet) spin-offs based on other characters that don’t follow the saga’s timeline.  Can you imagine how big a back-story on Yoda could be?  That alone could be a full series of movies.  Chewbacca and the rest of the gang could have plenty of screen time too.  The box office will be big, but the ongoing merchandising profits will be ridiculous.  My plan is to make enough from this and future DIS trades that I can keep up with my nine year old son’s appetite for everything Star Wars.

It’s not just the additional Star Wars movies that pumped up DIS today.  They also beat earnings estimates slightly with strong revenue from its parks and resorts division.  I think this third of their business will continue to improve as the employment picture across the country improves.  In addition, tourists from overseas should continue to flock to Mickey’s home if the dollar stays weak relative to the euro.

While DIS was trading at $54.95, I sold two DIS April $55 naked puts for $1.75 each and received $349.22 after paying commissions.  I thought about selling into a put spread before the markets opened.  I changed my mind once I saw the prices during live trading.  Part of that mindset shift came from the immediate sell-off in DIS from its opening price.  I’m bullish on DIS long term (the next Star Wars movie doesn’t even come out for two more years), but could see a slower path to new highs than I originally thought.  A put spread would give me downside protection, but the premium intake would be smaller.  I don’t expect DIS to fall too sharply from where it was when I made my trade today, so I opted to forego the insurance of buying puts to go with my short puts.

My break-even price is $53.25.  That gives me a buffer of 3.08% before I take a loss on the trade.  I only need DIS to gain a nickel to make a full profit and earn a 3.27% gain.  That will equal 16.1% annualized if it works out for me.  The only part that made me hesitate on this trade was DIS’ P/E ratio.  The trailing ratio is 17.53, but the forward ratio is 14.22.  I’m comfortable with a P/E below 15.  Above 17 makes me wonder if the upside is limited.  Then again, I only need a nickel of price improvement to make my full profit.  If they can avoid another John Carter type of flop, the earnings estimates should be very close to accurate and I’ll be safe.  Support looks like it’s around $52.  If that holds, I’ll run with a paper loss briefly before the stock recovers and makes money for me.

This sets up my April with a decent start to the month when coupled with my UCO covered calls set to expire then too.  This ~$350 and the UCO premiums put me close to $1,200 targeted for realized gains in April.  My February gains should be fine if IWM stays above my covered calls’ strike of $88 since I’ll pocket a good gain from my share price gain.  My MDY put spread is only 0.1% out of the money.  My March contract expiration is puny right now.  I’m not sure I’m going to target much more for March with volatility so low.  Maybe I’ll change my mind when I have a better idea how my February positions close at the end of next week.  That’s a long time to go for positions that are barely out of the money.