DIS Trade Update 2

by Dan May 12, 2011 9:14 am • Commentary

Well, DIS‘s lousy quarter was almost overlooked by investors yesterday morning until the market fell out of bed in the afternoon.  Stock closed down ~5.5% clearly outpacing the implied move……As I stated yesterday I was going to let this thing settle a bit, and that’s what I did.  At this point I turned a trade that cost me nothing into a loser but lets look at comparison to owning the suggested structure into earnings vs buying the stock outright……

-If you had bought the stock you would been down 2.40 (stock closed 43.90 on the close prior to earnings).  In place of the buying stock, if you had just sold the May 42 put and bought the May 44/45 call spread than you would essentially have lessened your loses on May expiration by almost 2.00 if the stock closed here around 41.50.  But there is a trade off, your gains would have been capped at 45 if the stock had gone up.  I liked the risk reward of the trade off and at one point yesterday when the stock rallied above 42.50 you could have sold your call spread for .08-.10 and covered that Put for ~.50.

-What to do now? I am waiting for the stock to settle and unless it meaningfully breaks 41 I will hold onto it and wait to be put the stock on expiration or hopefully have a rally above 42.

ORIGINAL POST MAY 11, 2011:

Yesterday after the close DIS reported a disappointing quarter that Merrill Lynch’s Analyst, in her review note, aptly called “Noisy.” From ML’s note this morning, The EPS miss was a result of :

(1) tough Film comps, incl. ~$75mn of EBIT impact from Mars Needs Moms, (2) $23mn from Easter timing, (3) $25mn from Japan (Park royalties & CP), (4) $15-20mn from Disney Dream pre-marketing costs, (5) $34mn from Playdom acquisition accounting and (6) DIS’ share of this year’s Cricket World Cup losses (via ESPN-STAR).

While most analysts noted that the above events were generally one time items, the sloppiness of the quarter sticks out to me in an earnings period of few disappointments…..

TRADE MANAGEMENT: Yesterday I wanted to make bullish near term play into earnings and suggested a May call spread risk reversal (below).  With the stock trading down ~3.5%, inline with the implied move, this will take a little trade management.  I am short 2 options and long one, vols will come in a bit and that will help, but the May 42 Put is the only thing you have to worry about at this point……With the stock at 42.40 I am going to sit tight for the moment and not over pay for the put as I would be comfortable owning DIS at 42 on next weeks close as long as I don’t think the stock is going to get sloppy.  Interesting to note that yesterday after this trade suggestion I saw that a large institutional player sold 10,000 of the May 42 Puts, basically making a similar bullish bet in very big size. The traders that are now long that line will have to buy stock to stay delta neutral below 42. This should provide some support.

TRADE From Yesterday:  DIS (43.50)- Sell the May 42 Put to Buy the May 44/45 Call Spread for Even

-Sell May 42 Put at .30

-Buy May 44 Call for .60 and

-Sell May 45 Call at .30

ORIGINAL POST FROM MAY 10, 2011:

DIS report tonight after the close, the implied move is ~3.3% vs the average move over the last 4 qtrs of about 3.75%…

-stock is up 16% ytd and 42% from it’s 52 week lows.

-analyst community generally positive on the name with 18 Buys, 11 holds and no Sells.

WHAT TO EXPECT:

-Deutsche Bank in their preview note of the DIS qtr suggested that in light of  “an estimated $15m impact from the Japan park shut-down and an estimated $50m write-down for Mars Needs Moms……..it is not clear Disney can beat by as much as they have the past few qtrs ($0.10 ahead of F1Q11, $0.04 ahead of F4Q10, and $0.05 ahead of F3Q10).

CMCSA‘s commentary last week regarding Universal Orlando’s strong performance should be good read across for DIS despite high gas prices, while Thor‘s solid weekend release and upcoming slate of expected summer hits Cars 2, Pirates of Caribbean and Captain America could drive upside.

MY VIEW: Disney is obviously one of the most economically sensitive consumer stocks and one that faces specific challenges when gasoline prices are high as they are now heading into the summer driving season.  But when you consider the market’s propensity to push higher and the performance of some of its peers I am hard pressed to see too disappointing of guidance out of these guys.

-Technically the stock looks poised to break out of 3 month range that it broke following their last earnings report in February.  The trend-line off the Aug 2010 lows should hold barring some very downbeat guidance.

DIS 1 Yr Chart Provided by Bloomberg

TRADE:  DIS (43.50)- Sell the May 42 Put to Buy the May 44/45 Call Spread for Even

-Sell May 42 Put at .30

-Buy May 44 Call for .60 and

-Sell May 45 Call at .30

Break-Evens on May Expiration:

Uspide: stock bwtn 44 and 45 can make up to 1.00, above 45 make full 1.00

Downside: btwn 44 and 42 no loses, below 42 (down ~3.5%) you are Put the stock and lose money.

TRADE RATIONALE: options are expensive heading into the print so I want to look for a way to lessen the premium outlay for a straight vertical spread.   I chose the 42 strike put as it sits right on the uptrend line and is in line with the implied move.  By paying nothing for the structure I have obviously increased my odds of success, but added considerable risk by selling the Put naked…..If this does not fit your risk profile you could sell the May 42/41 put spread and cap your risk, or avoid the Puts all together but recognize that it changes your odds of making money…..