New Trade $DIS: It’s A Vol World After All

by Dan April 26, 2013 1:56 pm • Commentary

Here is a preview of what I will be discussing tonight on Options Action on CNBC at 5:30pm est:

In a stock market that screams BULL, there have been few large cap stocks that have performed as well as DIS has ytd (up ~24% vs the SPX up 11%).  When DIS reported their Fiscal Q1 back in Feb, the company beat expectations on almost every metric.  This is of particular importance because in late 2012, the company’s Q4 results disappointed on the heels of week ad sales from ABC and ESPN.  In the Feb report, DIS saw material improvement on the ad front, enthusiasm about cable distribution deals/movie studio pipeline and strong demand at their theme parks.  Things seem to be firing on all cylinders  and I haven’t even mentioned the words STAR WARS!!

But here is the thing, how much better can the stock perform given what appears to be fairly high expectations heading into the company’s May 7th fiscal Q2 earnings report.  With the SPX within 1% of the all time highs, and DIS less than 2% from its recent all time highs, playing for a consolidation into the event via short premium structures seems like the way to play.

While the company’s results have been strong over the last several years, the stock’s current pace of appreciation has now exceeded that of the earnings appreciation.  The P/E multiple is now at its highest level in 5 years, and back to where it was in 2006, when DIS was only a $50 billion market cap (as opposed to $110 billion today).

12 month Trailing P/E of DIS, Courtesy of Bloomberg
12 month Trailing P/E of DIS, Courtesy of Bloomberg

Growth is a lot harder to come by at that size.

Volatility: Implied vol is elevated into earnings and will stay that way until the event. Here’s a look at the IV30 (red) and HV30 (blue) over the past year with earnings announcements indicated with E:

Screen Shot 2013-04-26 at 11.39.33 AM
from LiveVol Pro
TRADE: DIS ($61.85) Sold the May 62.50/65 Call Spread at .75

-Sold 1 DIS May 62.50 Call at 1.10

-Bought 1 DIS May 65 Call for .35

Break-Even on May Expiration:

-Profits of up to .75 btwn 63.25 and 62.50, max profit of .75 below 62.50

-Losses of up to 1.75 btwn 63.25 and 65, with max loss of 1.75 above $65 (up about 5%)

Trade Rationale:  Implied vol is elevated into the earnings event, and with the stock at or about all time highs, the best way to make a contrarian bearish play is with short premium trades.  When trying to pick a top, or a mere consolidation in a market that shows little signs of stress, I want to let time work in my favor.   The risk / reward of this trade, make .75 possibly lose 1.75 is not the typical sort of relationship that you will see on the site, but I place a very low probability on the stock being up 3-5% on May expiration unless the DIS puts up a massive beat and raise.