from the desk of Dr. Terry F Allen

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Don’t DIS This Trade

Walt Disney (DIS) reported solid earnings results after the bell on Thursday that beat analyst expectations on the top and bottom lines. Perhaps as important, subscriber growth to the Disney+ streaming service also beat estimates. And revenue from the company’s parks swung to a profit. Analysts greeted the news with ratings reiterations mixed with a few small target price increases. Perhaps the looming unknown effects of the Delta variant is keeping a lid on enthusiasm.

If you agree that DIS will stay above its 200-day moving average, consider the following trade that relies on the stock remaining above 175 through expiration in five weeks.

The stock quickly popped 5% on the news to hit a three-month high but retreated in Friday’s trading to close 1% higher. The shares have spent the past three months trading sideways after pulling back from an all-time high hit in early March. The 200-day moving average has recently been a major bastion of support. In fact, the last time DIS closed below this trendline was nearly 10 months ago. The 200-day sits just below the 175 level, which is the strike for the short put of our recommended credit spread. Thus, this trade is relying more on this support holding than DIS going on bullish run.

Buy to Open DIS 17Sep 170 put (DIS210917P170)
Sell to Open DIS 17Sep 175 put (DIS210917P175) for a credit of $1.05 (selling a vertical)

This credit is $0.04 less than the mid-point of the option spread when DIS was trading at $181. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $103.70. This trade reduces your buying power by $500 and makes your net investment $396.30 ($500 – $103.70).  If DIS closes above $175 on September 17, both options will expire worthless and your return on the spread would be 26% ($103.70 / $396.30).

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