“Cord-cutter” has become the new buzzword. From Sony (NYSE: SNE) to Apple (NASDAQ: AAPL), major entertainment names are throwing their hat into the on-demand video streaming ring.

The arrival of the big players has renewed fears that consumers would cut their cable cords en masse and send shares of cable content providers plummeting. While uncertainty has weighed on these stocks, the fears are overblown and have led to extremely cheap valuations on some really good assets.

[ad#Google Adsense 336×280-IA]Against the hype of the imminent demise of cable content companies is the fact that 85% of households still subscribe to cable.

While Netflix (NASDAQ: NFLX) carved out a niche in this area, other providers have had a harder time convincing consumers to make the switch.

Even the upcoming launch of the Apple TV subscription service is being met with some indifference.

More likely than the death of cable providers will be consolidation in the industry.

Companies will merge to gain negotiating leverage over the streaming service providers, allowing them to regain some control in both forms of distribution.

In fact, rumors are already building around one content giant.

Viacom (NASDAQ: VIAB) is one of the world’s largest media and entertainment companies with 237 channels in 40 languages and 169 countries. The media segment, which accounts for about 70% of revenue, owns hit networks like MTV, Nickelodeon, VH1 and Comedy Central. In addition, its digital properties see 50 million unique viewers a month.

Beyond the strong cable assets, the company also owns Paramount Pictures film studios, which has sequels in blockbuster franchises “Star Trek,” “Transformers” and “Mission Impossible” in the works.

Viacom isn’t putting all of its chips on cable services either. Paramount signed a deal in 2012 with YouTube to permit 500 titles for rent on the video site. That same year, Viacom announced a licensing deal with Amazon’s (NASDAQ: AMZN) video service for its TV network programming.

A Morbid Watch by Wall Street

The talk lately on Wall Street is Sumner Redstone’s ailing health and what might happen to Viacom when he’s gone. The 91-year old is chairman and controlling shareholder of National Amusements, the media empire that owns both CBS (NYSE: CBS) and Viacom. Through his ownership of class A voting shares, Redstone controls nearly 80% of the vote for Viacom.

Philippe Dauman, Viacom’s CEO, was seen as the likely successor after Redstone and daughter Shari had a falling out, but this might have changed. Dauman sold nearly $140 million of his shares in the media company late last year, driving speculation that he would not be the next chairman.

In February, it was reported that CBS CEO Les Moonves was talking to private equity investors about buying out CBS and could eventually make an offer for Viacom. A merger of CBS and Viacom would give it impressive bargaining power in negotiations with distributors and streaming-service providers. CBS network owns the rights to NCAA football and basketball distribution, as well as the NFL. The network’s studio division has consistently generated hit programs like CSI and NCIS that can create spin-off series.

Mario Gabelli, CEO of Gabelli Asset Management (GAMCO), which owns 10.4% of class A Viacom shares, has supported a merger of Viacom and CBS, saying the main question is “not if but when the [Redstone] family decides to sell.”

Limited Downside With the Potential for a Pop on Rumors

The B-class, non-voting shares of Viacom are down 22% since this summer and now trade for just 12.9 times trailing earnings. This is below the five-year average of 13.9 and well below the industry average of nearly 25. Analysts are expecting a 7.6% increase in earnings to $5.81 per share this year on 3.3% sales growth.

VIAB looks extremely cheap at current levels. While I am not going to attempt to call a rebound on fundamentals alone, the downside is limited on strong assets, and the stock has the potential to pop with any rumors of a buyout.

The strong value proposition and limited downside makes VIAB a perfect candidate for a put selling strategy.

Now, I know some of you may stop reading right here, thinking options are too risky. But when used properly, put selling is a conservative, high-income strategy.

With shares of VIAB trading for $70.11 at the time of this writing, we can sell the VIAB June 72.50 Puts for a limit price of $4.85 each ($485 per contract).

If VIAB does not close above the $72.50 strike price, which is 4% above the current price, at expiration on June 19, we will be assigned shares. Since we received $485 in options premium, our actual cost is $67.65 per share, a 3% discount to current prices. To cover this potential obligation, we will need to set aside $6,765 per contract, plus the $485 we received from selling the puts.

If VIAB closes above $72.50 on expiration, we keep the premium for a gain of 7.2% in 89 days. If we were able to make a similar trade every 89 days, we would generate a 29% annual rate of return.

— Joseph Hogue

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Source: Profitable Trading