Like millions of people all over the planet, I am fired up to about next week’s release of the Star Wars – The Force Awakens. This morning a new trailer was released in China. It reveals a bit more about the tightly guarded plot. The movie looks pretty cool:
If the film is in fact a throwback to the original trilogy of the late 1970s/early 1980s, and rejects the bastardization of the prequels that were released by Lucas Films in the late 1990s/early 2000s, then Disney (DIS) in one fell swoop may be able to equal their $4 billion purchase price for Lucas Films in 2012 in Star Wars related sales (not profits) in the very near future in ticket sales and associated apparel/sponsorships. DIS will be releasing a Star Wars related movie in each of the next five years, which will ultimately be married with the opening of Star Wars theme parks . The Walt Disney Company could soon find themselves be more associated with Luke Skywalker and BB-8 than Micky and Sleeping Beauty.
But it’s important to note that while their Lucas Films, Pixar & Marvel movies catch a lot of the headlines, in the fiscal year just ended, their Studio Entertainment segment equaled $7.4 billion sales, only 14% of its total of $52 billion, and $3 billion of its $14.7 billion of operating income. It’s really Media Networks (think ESPN) and Parks that are driving the train. From DIS FY15 Form 10k:
Despite the uncertainty surrounding DIS’s cable channels which ignited much of the stock’s volatility since its all time highs in early August, the stock is still up about 17% on the year. Shareholder enthusiasm for the Star Wars release has served as a bit of a buffer to the downside. But it would be complacent to dismiss the volatility in the stock this year, as DIS has traded in a 35% range, with three 25% plus moves, and is now approaching a very important technical level at $110, which is just above the stock’s 200 day moving average (yellow):
On a longer term basis, the seven year chart of DIS shows a double top at about $121 from early August and late November, with a re-test of the uptrend that has been in place since late 2011. This places a potential pull back at about $100:
What’s the trade into the New Year?
I suspect we won’t get any new news on cable bundles until the company reports their fiscal Q1 results in early February, but we will have ticket sales for Star Wars. And that could help drive sentiment.
For those who agree that $100 on the downside looks like great support, and a level where you would be inclined to be put the stock, then put sales at that strike could be a way to leg into a long. And if you think there is no way the stock gets there in the coming weeks then put sales at that strike could be a great way to finance a bullish trade that targets a retest of the prior highs. Here is the trade idea:
DIS ($110.75) Buy Jan 100 – 115/120 call spread risk reversal for 35 cents
-Sell to Open 1 Jan 100 put at .80
-Buy to Open 1 Jan 115 call for 1.85
-Sell to Open 1 Jan 120 call at .70
Break-Even on Jan Expiration:
Profits: between 115.35 and 120 make up to 4.65, max gain of 4.65 above 120
Losses: up to 35 cents between 115 and 115.35, loss of .35 between 115 and 100. you are put 100 shares of stock at 110, and losses below that.
Rationale: This trade plays for a move back to the highs and risks only 50c between 100 and 115. But it is only for those willing to buy DIS stock lower as you would be put the stock and a big more lower at an effective entry of 100.35. If DIS does go back to the highs the 35c premium paid could be worth up to 5.00.
This is a good structure for those worried about an entry, willing to buy lower, but also don’t want to miss a more immediate move higher.