Star Wars is slated to become the biggest box office hit since Avatar with as much as $3 billion in revenue from all sources. The Force will be with Disney for a long time to come.

As the excitement builds about the new Star Wars movie most people do not realize what a cash generating machine Disney really is. Ticket sales from the current Star Wars movie is expected to reach $2 billion or more with toy sales and merchandising adding another billion in the next couple years. This is just the first of three Star Wars movies on the Disney calendar.

Recently Disney shares took a dive because of falling subscriptions to the ESPN channel. In the recent 8K, Disney said subscriptions had declined from 95 million to 91 million because of a lack of any major sporting events in 2015. They expect the subscriptions to rise again in 2016 because of the Olympics. This is a short-term problem but one that will be more than overcome by the large number of blockbuster movies on the Disney schedule. This company is printing money with its creative studios.

Remember, Disney now has Marvel, Pixar and Star Wars (Lucasfilm) all under the same roof.

Disney Movie Schedule

Dec. 18th, 2015 - "Star Wars: Episode VII - The Force Awakens"
Jan 29th, 2016 - "The Finest Hours"
Mar 4th, 2016 - "Zootopia"
April 15th, 2016 - "The Jungle Book"
May 6th, 2016 - "Captain America: Civil War"
May 27th, 2016 - "Alice: Through the Looking Glass"
June 17, 2016 - "Finding Dory"
July 1st, 2016 - "The BFG"
Aug 12th, 2016 - "Pete's Dragon"
Nov 4th, 2016 - "Doctor Strange"
Nov 23rd, 2016 - "Moana"
Dec. 16, 2016 - "Star Wars Anthology: Rogue One"
Mar 17th, 2017 - "Beauty and the Beast"
April 14th, 2017 - "Ghost in the Shell"
May 4th, 2017 - "Guardians of the Galaxy II"
May 26, 2017 - "Star Wars: Episode VIII"
June 16, 2017 - "Toy Story 4"
Mid 2017 - "The Incredibles 2"
July 17th, 2017 - "Pirates of the Caribbean"
Late 2017 - "Thor: Ragnarok"
Early 2018 - "Frozen 2"
May 4, 2018 - "Avengers: Infinity War - Part I"
2018 - "Untitled Star Wars Anthology Project"
May 3, 2019 - "Avengers: Infinity War - Part II"
2019 - "Star Wars: Episode IX"

We should not overlook their theme parks, which are also doing great. Disney said they are considering a tiered pricing for tickets with high volume attenfance dates costing more. The three levels for the season pass holders would be gold, silver and bronze. Gold passes could be used any day at any time and would obviously be the most expensive. Silver would only be good for off peak days and not valid for holidays. Bronze would be the cheapest and would only be valid on certain off peak periods. Currently discounted tickets for those customers spending multiple days and with children under the age of ten begin around $100.

Don't forget their theme cruises. Disney is not having any problems filling up their cruise ships and prices have remained strong.

The only real challenge to Disney today would be a slowdown in consumer spending. The company said they are not seeing any decline despite the drop in retail sales numbers over the last several months. Consumers are just spending their money on diffrent things like cable movies, theme parks and iPhones.

Disney shares declined from $120 to $107 on the decline in ESPN subscribers despite guidance from the company that earnings would continue to rise. Most analysts believe this is a buying opportunity. Disney was also downgraded on Dec 18th by an analyst at BTIG that believes the stock is too expensive at the current level. However, on the same day Rosenblatt Securities upgraded Disney with a price target of $130.

There are multiple ways to invest in Disney.

1. Stock.

You could simply buy the stock, which is $108 today. That means 100 shares would cost you $10,800. If Disney rallies to $130 that would be a 20% gain in your position. With a stock you can hold it longer term if you think it will continue to go higher.

2. Short term call option.

You could buy the February $115 call option at $2.88 today. That would cost you $288. That gives you all the gains over $115 on 100 shares of Disney stock. If the stock rallied to $130 the option could be worth $17 or roughly a 400% gain.

You could also buy the February $120 call option at $1.56 today and the same rally to $130 would make your option worth about $11 or about a 500% gain. The downside to the higher option strike is that Disney has to move much farther before you are in a profitable position.

3. Long term call option.

You could also buy a longer term January 2016 $115 LEAP Call for $9.60 but I consider this a bad deal. The premium is too high and Disney would have to rally to well over $130 to make it a viable alternative. To compare with the other two options a rally to $130 would only raise the option price to about $17 and produce only about a 75% gain. The problem is the high premium that will fade as time passes.

The best strategy

Given the multiple strategies above I would pick the short term $115 February call because it balances the cash outlay with potential stock movement and the probability of a return.

Risk Management

If you bought Disney shares you are at risk for a decline. If the market dropped significantly Disney shares could decline with the market. If you bought those shares at the $112 level today and the stock dropped to $100 you would have a loss of $1,200. You can of course hold on to those shares and hope that the market recovered and Disney rebounded to higher levels.

Disney's low for 2015 was $90 and if it returned to those lows you would be out $2,200. While nobody expects Disney to decline to those there is always the possibility of a market event.

Limited risk.

When you buy a call option you limit your risk to whatever you paid for the option. In the example above your risk would be $288. You can never lose any more than that. At the same time your profit potential is unlimited. Regardless of how high Disney shares rose by the February expiration you would capture 100% of the gains over $115 less the original cost of your option at $2.88.

Millions of investors use stock options as their investment of choice. Options offer the best combination of low cost, low risk and maximum return. Are you investing with options?

Invest with the Force and buy some Disney options before box office news is out.

Jim Brown

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