Confidently Rush Into Comcast Corporation — Fears Are Overblown

CMCSA

Source: Mike Mozart via Flickr

Unreasonable fear sometimes creates great opportunities. This week we got one for Comcast.

This week we saw an end to the saga of the merger of AT&T Inc. (NYSE:T) and Time Warner Inc (NYSE:TWX) when the judge finally approved the deal without any restrictions. This was the green light for other mergers to follow. Front and center is the fight over Twenty-First Century Fox Inc (NASDAQ:FOXA). Walt Disney Co (NYSE:DIS) has already submitted its bid but the expectations had been that Comcast Corporation (NASDAQ:CMCSA) will also want it.

Last night, CMCSA confirmed it’s official bid for Fox assets. They offered the equivalent of $35 per share which is a 19% premium to the offer from Disney. So the bidding war has officially begun. On the news, Comcast stock fell 5% at yesterday’s open. I jumped on the opportunity and bought calls which increased in value 30% in mere hours.

So I come into this trade with money in pocket already. I believe that Wall Street was wrong fearing CMCSA’s interest in FOX as bad thing for shareholders. I see it as a win-win situation and therein lies the opportunity.

If Comcast wins the bidding war, it will end up with more content and wider reach. Conversely, if it loses the bid to DIS then it will use the cash to do more buyback programs. In either case, the stock of Comcast is likely to benefit in the long run.

So this trade is to profit from ill-advised knee-jerk reactions by those who fear a scenario that is not likely to come in 2018. In addition to my bullish stance that I started yesterday, today I share an options trade that will eliminate my call cost basis by selling downside risk into unreasonable fears. Worst case scenario, if price moves against me I end up owning shares of Comcast stock at a deep discount.

Year-to-date, CMCSA stock is struggling, down nearly 20%, but there is hope. The stock recently stabilized and looks like it is ready to resume its breakout from the descending trend line of lower highs. Support below $30.50 per share is likely to hold as long as markets in general don’t sharply correct. As it is, CMCSA is relatively cheap with a 14 price-to-earnings ratio.

In the current macroeconomic conditions where central banks are still relatively friendly to stocks and with the new U.S. tax laws, companies are likely to do well for years to come. So I consider betting on proven support as a low-risk trade. This fits well within my conservative portfolio.

This battle over the FOX assets is because of what Netflix, Inc. (NASDAQ:NFLX) has done. They laid the ground work for the shift our media consumption to streaming from traditional. The FOX assets are a doorway into the streaming world. DIS already announced their platform to come and CMCSA would also want to join the new media consumption trend.

CMCSA Stock Trade Ideas

The Trade: Sell the CMCSA Jan 2019 $27.50 naked put for 85 cents. This is a bullish trade where I have an 85% theoretical chance for maximum gains. Otherwise, I will own shares and accrue losses below $26.65.

Selling naked puts is daunting. Those who want to mitigate that risk can sell spreads instead.

The Alternate Trade: Sell the CMCSA Jan 2019 $27.50/$26.25 credit put spread, where my risk is limited. In this case, if the spread wins it would deliver 20% in yield.

Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. This article was originally published on June 14, 2018.

 

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Category: Options Trading Strategies

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