Unlike more speculative investors, I like to purchase LEAPs that are already in the money. That way, if my thesis proves to be wrong, there's still a decent chance of recovering some principal before the intrinsic value if the option falls to zero.
In this case, I purchased Disney LEAPs at an $85 strike price when the underlying stock was still trading for about $98 a share. That's roughly $13 a share in intrinsic value, which I figured was a reasonable cushion. The downside, of course, is that protection doesn't come cheap. Here, I paid $20 per share for every contract I bought. And since options contracts are sold in 100-share bunches, it's easy to see how this became an expensive bet.
Again, it sounds crazy. Option pricing is subject not only to the volatility of the market and the underlying stock price, but also time. Every day that passes is another day the contract loses a portion of its "time value." Investing in options can be like playing a game of beat the clock. I never play unless the odds favor a big win.
Captain America and Iron Man square off in next year's Captain America: Civil War . Credit: Marvel Entertainment.
Here are the scenarios as I figured them:
- WORST CASE : Cable performs even worse than expected, retreating from slow growth to negative growth. Star Wars: The Force Awakens fails to top The Avengers as Disney's biggest film, leaving Avatar 's record safely intact. Investors panic and send the stock below $85 a share for the first time since Oct. 2014, and my investment goes to zero. Odds -- highly unlikely given the catalysts.
- EXPECTED CASE : Box office outperformance compensates for cable weakness, and then some, leading to profits that match Wall Street's expectations. The stock reaches analysts' average price target of $119 a share, pushing the intrinsic value of my options to $34 a share, and I collect a 70% gain in less than two years. Odds -- highly likely given the catalysts and recent stock action.
- BEST CASE : Esports coverage provides a catalyst for ESPN, spurring unexpected growth in the cable business. The Force Awakens tops $3 billion worldwide, and Civil War tops $1.5 billion ahead of Finding Dory , which sets a new Pixar record with $1.2 billion in worldwide grosses. Adding Star Wars -themed rides helps the Parks division set another attendance record. The stock finishes calendar 2016 at $186 a share, and I collect a five-bagger. Odds -- highly unlikely, but certainly possible.
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The article How "Star Wars: The Force Awakens" Could Double My Money in Disney Stock originally appeared on Fool.com.
Tim Beyers likes Star Trek just as much as he likes Star Wars. He's also a member of theMotley Fool Rule Breakersstock-picking team and the Motley Fool Supernova Odyssey I mission and owned shares of Disney at the time of publication. He was also long Disney Jan. 2017 call options. Check out Tim's web home and portfolio holdings or connect with him on Google+ , Tumblr , or Twitter, where he goes by @milehighfool .The Motley Fool owns and recommends Walt Disney. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy .
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