One of the biggest effects of the pandemic and lockdowns was the cancellation of sports. That's not just a minor inconvenience for sports fans – there are billions of dollars at stake.
Not only does that mean the money is going somewhere else, but it also means some companies that rely on sports revenue are taking a huge hit.
While some leagues have managed to pull together strategies to get games on TV (even with no fans), it's not a foregone conclusion that all sports will return to normal soon.
The NBA is able to finish its season because its players are confined to the "bubble" in Orlando. Meanwhile, baseball keeps getting interrupted with positive COVID-19 tests, and NCAA football is in serious jeopardy this fall, with two major conferences already calling off the season.
We have no idea how the NFL will handle playing a season under these conditions either. Not to mention, another flare-up of the virus during flu season could set all these leagues back to where they were in the spring.
That's why Tom Gentile, Money Morning's options trading specialist, is taking a hard look at Disney stock.
Walt Disney Co. (NYSE: DIS) was one of the hardest-hit stocks during the pandemic, dropping 42% between Jan. 1 and March 23. With its portfolio of theme parks and cruise lines, Disney became a popular target for bearish traders.
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Today, shares have rallied nearly 60% higher since their March lows, and the stock is within striking distance of getting back to even on the year.
That growth might not hold up if sports don't return this fall.
And it's making put options the perfect strategy for Disney stock…
Use This Options Strategy on Disney Stock
Disney isn't just a theme park operator; it's a media conglomerate. It owns ABC, which has contracts to broadcast many games across many leagues. It also owns ESPN, the premier sports network on TV and radio. Both outlets will be lost without live sports. There are only so many reruns of games from years ago that the public will watch.
Back in January, college and professional sports was forecast to bring in more than $75 billion in revenue this year. That's pretty much gone, thanks to the coronavirus.
It does not stop there, either. The 2020 Olympics in Tokyo has been shelved. Major college conferences have already canceled the season, and it's just a matter of time until more follow suit.
And that should send Disney shares tumbling from what seems to be a lofty perch right now. Surprisingly, whether on hopes for a COVID cure or just blind optimism, shares recovered almost to where they were trading as the market was peaking in mid-February. When that hope and optimism are shattered and the reality of no real return to sports sets in, it probably won't be good for shareholders.
But it can be great for options traders.
Rather than buying call options, as most individuals do, we are going to buy puts to profit from the Disney's next decline.
A put option simply gives the holder the right, but not the obligation, to sell a fixed number of shares of the underlying stock for a fixed price (the strike price) by fixed time (the expiration date).
Tom has two guidelines to help you buy the right puts, remembering that this is a trade, not a long-term investment.
First, buy out-of-the-money (OTM) puts, two strikes below the current stock price. Out-of-the money puts are cheaper, but they will expire worthless unless the underlying stock moves lower. By keeping just out of the money, you lower your up-front cost while also giving yourself the best chance of making money if the stock moves in your direction.
Second, use options with a 60- to 90-day expiration window. The shorter the time to expiration, the faster the options prices will move.
Here is an example of a simple put trade, but you can choose the strike price and expiration combination that works for you.
With Disney stock trading near $133 this week, you could buy a DIS Oct. 16, 2020 $125 put for $3.15 (or $315 for 100 contracts). Should DIS shares drop in the fall, this option will increase in value. And if they close below the strike price of $125, they will lock in a profit.
For a little perspective, a drop to $120 – which is below the strike price – is well within reach, as that is where the 50-day moving average is today. In other words, it is a very small drop given the rally Disney enjoyed since March, yet it can return many times your investment – maybe even triple-digit percentages.
But that's not the only way to play put options right now.
Tom has an even more powerful strategy you can use right now…
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