Trade Alert – (DIS) June 14, 2012

As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.

Trade Alert – (DIS)

Buy the Walt Disney Co. (DIS) October, 2012 $38-$41 Call Spread at $2.60 or best

Opening Trade

6-14-2012

expiration date: October 19, 2012

Portfolio weighting: 25% = 100 contracts

This is a bet that the Walt Disney shares (DIS) will not trade under $40.60 by the October 19 expiration, or down $7.50 from here. That is at the April low, and down 14% from today’s price.

By my calculations, to get (DIS) down that far, the S&P 500 (SPX) would have to fall below 1,150 by October, which I believe is unlikely. Markets will probably rally into the US presidential election, not because of who may win, but because the largest uncertainty of the year is about to disappear.

If this spread expires anywhere over $41, as I hope, your total profit should amount to (100 X 100 X $0.40) = $4,000. That gives you a profit on this four month play of 16%, or 4.00% for the notional $100,000 model portfolio. Professional options traders do this sort of trade all day long. This is the same as taking out $7.52 out of the stock on a non-leveraged basis.

Walt Disney has one of the world’s great consumer franchises, and seems to be going from strength to strength. It is the type of high quality stock that investors will flock to in these uncertain times, although the dividend is nothing to write home about.

Business at the theme parks is booming, shaking off any weakness from the stagnant US economy and the European recession. After taking a hickey on the disastrous John Carter movie, it launched the year’s biggest blockbuster with The Avengers. The California Adventure park in Los Angeles is about to open a new “Radiator Springs” area to capitalize on the “Cars” franchise. My only complaint is that the Euro Disney outside of Paris should be serving better wine.

If Greece or Spain forces us into major meltdown mode, we can always hedge this modest “RISK ON” trade through taking more aggressive “RISK OFF” positions, like selling short the (FXE), (SPX), (IWM), (GLD), or the (SLV) by buying puts.

Don’t place a market order for this trade or the floor traders will rip your eyes out. Don’t place individual orders for the legs either. Instead, place a limit day order in the middle market for the call spread only around $2.60, and wait for the market to come to you. It will find you. If nothing happens, you can always walk your limit order up five cents at a time until you get done.

Spreads can be wide on the deep out of the money $38 calls. There’s no rush to do this, but if you get filled today you can capture the extra sweetener of the time decay over going into the summer slowdown.

These are the trades you should execute:
Buy the August, 2012 (DIS) $38 calls at …. ………$9.85
Sell short the August, 2012 (DIS) $41 – calls at…. $7.25

Net Cost:……………………………………………$2.60

Expiration calculation

Value at Expiration ($41 – $38)          $3.00
Cost:                                                          $2.60
Profit:                                                       $0.40