Friday afternoon I laid out a very near term bearish case for shares of Disney (DIS) into their fiscal Q1 report due after the close tonight (read below). I wanted to be very clear, DIS is a stock that is actually on my Buy list on quick reset to the mid to low $80s as their movie pipeline for the balance of the year (Avengers in May & Star Wars in Dec) could have a sort of “Frozen” effect on earnings for the back half of 2015 into 2016. But in the near term, the recent hiccups in ad spacing at ESPN, the tough comparisons from Frozen, the recent results from Cruise lines and the stock’s valuation line up for the potential for a “sell the news” reaction on weaker than expected guidance.
Obviously earnings trades that are directional, and utilize short dated long premium structures can be a difficult way to make a living, and I usually risk what I am willing to lose on such trades, but given the post earnings weakness from bell-weathers like AXP, JPM, MSFT, PG & UPS, I think DIS could set up similarly.
To refresh, here was the trade from Friday afternoon:
TRADE: DIS ($92.05) Buy Feb 92.50 / 87.50 Put spread for 1.50
-Buy 1 Feb 92.50 put for 2.10
-Sell 1 Feb 87.50 Put at .60
Since posting on the trade Friday afternoon, the stock has been a tad volatile, trading down from $92, to almost $90, back to $93:
The trade was a quick winner yesterday, and now a slight loser, with stock at $92.60, the trade structure is worth about $1.40, down from the $1.50 purchase price.
So what to do? The 6 month chart is fairly interesting, the stock bounced yesterday right where it should have, at $90 support (red line) and paused today, right at its 50 day moving average (purple line):
At this point there are two things to weigh, first whether the company has a beat and raise causing the stock to re-test the prior highs above $95. I have no idea, my trade is predicated on what I believe to be overly positive sentiment in the face of potential near term headwinds to the company raising guidance. Secondly, why the stock caught my radar is the perception that investors are shooting first and asking questions later on the slightest bit of bad news in prior market leaders. To be clear I would not short DIS, but the defined risk set up is interesting.
The 92.50 put is basically at the money and the entire structure is about 30 deltas so the trade is very binary on the earnings move. Vol will come in a little but it’s not that high historically so even a sideways move will preserve most of the value of the trade and we’ll have to decide what to do with a small loser if that’s the case.
If there is a down move in the stock it’s unlikely that the stock breaks support at 87.60 so our short put is a good way to lay off some premium risk. A move higher and we’re likely down at least 50% on the trade and we’ll just take our medicine and close as the structure would be pretty out of the money at that point.
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Original Post Jan 30th, 2015: New Trade – $DIS: Mouse Trap?
Disney (DIS) reports their fiscal Q1 earnings Tuesday after the close, the options market is implying a 3% on day move, vs the 4 qtr avg move of only 1.7%. The stock is obviously not a huge mover on earnings, but next week’s report could be different for a few reasons. First things first, large cap market darlings of the last couple years of the bull market are not immune to minor hiccups (see AXP, JPM, MSFT, PG & UPS). Part of the reason is that as volatility across other risk assets has increased, it has caused investors to re-evaluate what they own and why. For instance, paying 21x expected earnings in PG that are expected to be flat, with no sales growth, for the dividend yield with the stock near all time highs??? Pahlezzzz.
After DIS reported Q4 in early November, the stock took a fairly short pause as strength in the Parks division and strong studio performance from Guardians of the Galaxy was offset by weaker than expected results in their Media unit as ad pacing declined at their crown jewel ESPN.
Just this week we got poor results from the cruise lines, as they face headwinds from the strong dollar. Disney gets more than 40% of sales from overseas. DIS is much less exposed to the dollar strength, but it is important to note that the strong dollar can have an effect on foreigners coming to the U.S. to vacation which could be a headwind to the Parks division. The fact is, I doubt the results differed too much, but the risk taking environment among investors might have.
I would add one more point, DIS’s movie pipeline is massive, Avengers Sequel in May, Star Wars in December, and a couple dozen movies from their core franchises (including Toy Story in 2017) over the next three years. The purchase of Marvel Entertainment and Lucas Films will likely be DIS CEO Bob Iger’s crowning achievements. But in the near term, tough comparisons from the Frozen success that spread into early 2014 has caused analysts to expect a sharp earnings deceleration from 28% in 2014 to 8% in 2015, with sales growth declining from 8% to 6%. With the stock trading near 20x expected 2015 earnings growth of 8%, it looks expensive.
Taking a quick peak at the chart, the stock has obviously lost a bit of momentum, after spending most of 2013 and 2014 in a very consistent uptrend. I like playing for a break below $90 on the print with the stock finding some support in the mid to high $80s:
I am going to start a defined risk position now, leaving room to add next week as I will have two full trading days prior to the report:
TRADE: DIS ($92.05) Buy Feb 92.50 / 87.50 Put spread for 1.50
-Buy 1 Feb 92.50 put for 2.10
-Sell 1 Feb 87.50 Put at .60
Break-Even on Feb Expiration:
Profits: between 91 and 87.50 make up to 3.50, max gain of 3.50 below 87.50
Losses: up to 1.50 between 91.20 and 92.50, with max loss of 1.50 above 92.50
Rationale:
This is a nice risk reward set-up into the event. If I’m wrong it’s a small % of the overall stock, but if right I get an outsized payout on the event move. I’ll circle back to this trade before the event as I started small with the idea that I may need to make some adjustments to strikes depending upon where the stock is Tuesday afternoon prior to the report.