Star Wars could act as hyperdrive for Disney's Stock

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Michael Fowlkes 11/30/2015

It would be next to impossible to ignore the mania surrounding the upcoming release of Star Wars 7: The Force Awakens . In stores across the nation, and in countries around the world, Star Wars merchandise is everywhere.

The new Star Wars movie is set to release on December 18, and based on presale numbers, the move has the potential to break all previous box office records. The hype surrounding the movie has reached a fevered pitch, and whether or not the movie does wind up being the "biggest movie ever", its success is almost a given at this point.

There is a different feel about the new Star Wars release versus previous releases for the franchise. Every Star Wars movie has a lot of hype leading up to the release, but the mania ahead of The Force Awakens has moved to the next level.

If you find yourself wondering whether or not the hype around this movie is bigger than previous movies in the franchise… the answer is yes. There are a couple reasons for this. One is J.J. Abrams signing up to direct the movie, but the main catalyst is Disney ( DIS ).

In 2012, Disney purchased Lucas Film for $4 billion, which gave it control over the Star Wars franchise. While it is unlikely that it will recoup the entire $4 billion on the first film, the expected success of The Force Awakens is sure to help Disney make back a huge portion of the cost to acquire the franchise, and with two more films in the current trilogy expected in the next four or five years, it will certainly recover the entire $4 billion by the time the ninth installation of the franchise hits the big screen.
Disney is a master of promoting its movies, and just as masterful at creating merchandising campaigns. Just think about how many Frozen dolls and other merchandise you have seen over the last few years. Frozen was released in 2013, and Disney is still making huge money off its merchandising. With Disney behind the Star Wars franchise, it was inevitable that Star Wars mania would take over the world.

In addition to box office sales, Disney stands to profit in several other ways. Disney will also look to capitalize on the Star Wars franchise through merchandising deals, television programming, and amusement park attractions.

Disney has a lot on the line, but barring a wave of hugely negative reviews from early movie-goers, it seems like it has a big hit on its hands. The media blitz ahead of the release has been tremendous, and bringing on rock star director J.J. Abrams has expectations running high

Disney stock is trending sharply higher ahead of the movie release, and despite the stock trading just 2.8% below its all-time high, I see a lot of upside potential for DIS shares on the back of the Star Wars release.

I am very bullish on DIS stock, and with a P/E of 24 and forecast earnings growth of 10% next year, I see a decent amount of upside potential. While I am bullish on the stock, recent, yet brief, concerns over subscriber losses in its cable division do create enough uncertainty in the stock that I would advise using a covered call trade to pick up shares at this time.

Using a covered call, you are able to get into DIS stock at a discount to today's trading price, and set up a trade that will earn a profit even if the stock trends lower following the Star Wars release.

DIS is currently trading at $118.67, and we are going to look at setting up a February $120 covered call on the stock.

Chart courtesy of www.stockcharts.com .

In order to set up the trade, you would buy DIS shares ( typically 100 share lots, scale as appropriate ), while selling the February $120 call for a debit of $114.02 or better per share. After setting up the trade, your break-even on the trade is your original debit of $114.02 per share, which means that you can turn a profit on the trade even if DIS shares fall as much as 3.9%.

The ideal scenario for the trade would be for DIS to close trading above $120 on February 19. Should this occur, the sold call would be assigned, and the market would exercise its right to purchase your DIS stock at $120 a share. With a cost basis of just $114.02, the trade has a target return of 5.2%. The trade has a life of 84 days, resulting in an annualized return of 22.8% ( for comparison purposes only ).

If DIS is under $120 at February expiration, you could still sell your shares for a profit as long as the stock is above the break-even $114.02 point, or you could also chose to sell another call out into the future to lower your cost basis more, or you could simply hold on to your shares and wait for shares to move a bit higher. Even in this scenario you have DIS shares in your portfolio with a cost basis of just $114.02 versus $118.67 which is what you would have to pay to buy the shares at the current trading price.

The other possible outcome would be for DIS to trend lower than $114.02 by February expiration. In this scenario you would still have the option to sell another call against your shares to lower the cost basis a little more, or you could hold the stock and wait for shares to trend back above your cost basis. If you take on the stock at that point was bearish, you could always dump the stock and take a loss, but with the shares have a cost basis 3.9% lower than the current market price, the covered call strategy helps you cut your loss by 3.9%.

In addition to the above outcomes, DIS will pay one dividend during the holding period, which will help boost returns slightly.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Originally published on InvestorsObserver.com

This article appears in: Investing , Options
Referenced Symbols: DIS

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