Name That Trade – $DIS

by Dan February 5, 2013 3:06 pm • Commentary

After taking a close look at DIS’s set up into earnings tonight (preview below) we identified a few trades that we liked, but we didn’t pull the trigger.  Our thinking is that DIS is likely to stay inside its implied move and a good way to play for that is through calendars or short strangles. With the stock at 54.25 the strikes don’t perfectly line up and we would love to catch DIS at its highs for a move slightly lower so we looked at the 52.5 line.  As I said below, I am not a fan of committing new money to stocks at all time highs, no matter how good the fundamentals are.  

Trade 1: Fading the implied move, but with a slightly lower bias:

Buy the DIS ($54.25) Feb/Mar 52.5 Put Calendar for 0.43

This trade would work great on a small move down or no move at all. We liked it for the possibility that DIS stock is getting a little tired at its highs and a pullback may be in the cards. The problem with that is the earnings move itself is by and large a 50/50 proposition and didn’t want to be long what is essentially a bearish bet in March if the first move on earnings is higher. (we would then we long the wrong put strike for a fade of that initial move)

Trade 2: Fading the implied move, but with a slightly higher bias:

DIS ($54.25) Feb/Mar 55 Call Calendar for about .44  This one is a little tighter and any meaningful move up on earnings would put this one at risk.

Trade 3: Fading the move with no directional bias:

Both of the above Trades have a directional bias, but the trade that we would really like to do, but we do not detail on the site because we rarely sell naked options is selling the DIS ($54.25) Feb 52.50/55 Strangle at 1.15, offering break-even on the downside at 51.35 (down 5.3%) and break-even on the upside of 56.15 (up 3.5%).   Btwn 55 and 52.50 u can make the full 1.15 on Feb Expiration.   Again, this is for the more sophisticated options trader who understands the risks of being naked short options and has the margin to cover such a trade.  We do not think short naked strangles are appropriate for most retail options traders.



Original Post Feb 5th, 2012: $DIS Fiscal Q1 Earnings Preview

Event: DIS reports their fiscal Q1 earnings tonight after the close, the options market is implying about a 3.7% move vs the 4 qtr avg move of ~2.4% and the 8 qtr avg move of ~4.4%.   In this trailing 8 qtr period, there have been 2 moves btwn 5 & 6%, 2 up and 2 down and one decline of ~9%.

Sentiment:  Wall Street analysts are generally fairly positive on the stock with 22 Buys, 10 Holds and only 1 Sell with an avg 12 month price target of ~$58.  Short interest sits at a tad over 2% of the float.

Options Volumes / Open Interest:  Open interest was skewed much more to puts prior to Jan expiry, but has since evened out, with call to put ratio back up to 0.9.  Call volumes have been more active than puts by a 1.5 to 1 average over the past 20 days.

The largest individual lines of open interest are in Jan14 expiration:  14k of the Jan14 45 Puts, 11k of the Jan14 57.50 calls, & 10k of the Jan14 55 calls.

Price Action / Technicals:  The DIS is basically trading at all-time highs, after breaking out to new highs 2 weeks ago.  The previous high was made in September, around 53.40.  The 1 year chart shows a clear uptrend in place:  

[caption id="attachment_22332" align="alignnone" width="613"]1 year chart of DIS, Courtesy of Bloomberg 1 year chart of DIS, Courtesy of Bloomberg[/caption]

The 200 day moving average has been upward sloping for most of the past year, indicating a strong uptrend.  The stock’s recent breakout above the $53.40 level (which I’ve shown with the red line) has held, as that level has acted as support over the past 2 weeks.  There is no real resistance level with the stock close to all-time highs.  However, the main disruption to the uptrend in the past year was its last earnings report, shown by the gap down to the 200 day ma in early November.

Valuation / Fundamentals:  Though DIS is at all-time highs for its stock price, its valuation multiple is not stretched relative to history.  Here is the chart of its trailing P/E over the past 10 years:

[caption id="attachment_22334" align="alignnone" width="504"]7 year chart of P/E, Courtesy of Bloomberg 7 year chart of P/E, Courtesy of Bloomberg[/caption]

So at 17.5x, it’s near the upper end of the 5 year range, but in the middle of its 7 year range (DIS grew earnings 40% yoy a couple times in the mid-2000’s).  Its projected earnings growth of about 15% over the next 2 years makes 17.5x seem fair to cheap, if DIS can achieve those projections.

Back in Nov when DIS reported disappointing Q4 that was highlighted by lower than expected ad sales and margins in their cable networks, miss in their studio entertainment, but mildly offset by decent performance in theme parks and cruises.

Vol Snapshot:  Implied volatility (red) vs. realized volatility (blue) over the last year has been relatively stable, with both measures fluctuating in a range between 18 and 28:

[caption id="attachment_22333" align="alignnone" width="673"]30 day Implied vs. Realized Volatility, 1 year chart, Courtesy of LiveVolPro 30 day Implied vs. Realized Volatility, 1 year chart, Courtesy of LiveVolPro[/caption]

Implied volatility is at the same level it has been for the past 4 earnings events, close to the 25 level.  In short, implied volatility seems priced fair vs. current realized volatility, and relative to recent history.

My View: While the fiscal cliff debate was a drag on consumer spending in Q4, the payroll tax hike is likely to have a similar effect in Q1.  If last week’s consumer confidence print is any evidence of this, my sense would be that the risk reward of committing new $ to DIS at ALL TIME HIGHs is not particularly great.  There are a lot of moving parts when looking at this company, from studios that can offer a fairly large delta on earnings, to theme parks both here and abroad and of course advertising and cable revenues. I am certainly not a media analyst, but a wait and see approach for directional players could be the way to go, but we are taking a closer look from a vol perspective.