Name That Trade(s) – $DIS: When You Wish Upon a Death Star

by Dan August 4, 2015 12:33 pm • Commentary

Yesterday (read here) I highlighted some put activity in Disney (DIS), a day before the company reports fiscal Q3 results after tonight’s close:

The largest trade of the day came shortly after the open. When the stock was $121, a trader bought to open 8300 Aug 115 puts for .68 to open. These puts represent $565,000 in premium and break-even down at $114.32, down 5.5% from current levels on Aug expiration.

The options market places less than a 20% chance that these puts will be in the money on Aug expiration, but options prices appear cheap, with 30 day at the money implied vol well below levels of its last couple earnings reports.

Options volume ran almost 4x average daily volume yesterday, and is already running nearly 2x average today, with calls outnumbering puts 2 to 1.

Event:  the options market is implying about a 3% one day move, which is a tad rich to the 4 qtr average of about 2.5%.  Looking at the last 4 post earnings moves, -20 bps, + 7.6%, -2.17% and -18 bps it’s clear that the stock usually doesn’t move a ton post earnings.

Price Action Technicals: The stock is trading at all time highs, up 29% on the year, and up 55% from the 52 week lows in October.  The one year chart below shows the stock’s consolidation following fiscal Q2 results in early May, and its subsequent 10% breakout to current levels since mid June:

DIS YTD from Bloomberg
DIS YTD from Bloomberg

While this looks like a healthy breakout after a consolidation, the 20 year chart, representing 700% gains off of the post financial crisis lows, and the 2012 breakout above the 2000 highs, resulting in nearly 200% gains, looks anything but natural:

DIS 20 yr chart from Bloomberg
DIS 20 yr chart from Bloomberg

Volatility SnaptShot: The one  year chart below of 30 day at the money implied vol (the price of options in blue) vs the 30 day realized vol (how much the stock has been moving, in white) shows IV below levels option prices have been prior to the last couple reports, and realized vol just off of 2015 lows.  Both speak to complacency, in my mind, with the stock at all time highs, up massively on the year.  Options prices look cheap:

From Bloomberg
From Bloomberg

Fundamentals: You know the drill, ESPN, Avengers and Star Wars, oh and the parks are doing well. That’s all you need to know.  The big unknown for now is the runway for Star Wars, and it looks substantial from what will be a half dozen movies, spin off shows and never ending merchandising in the next 10 years.  But the stock seems to reflect a good bit of this enthusiasm, trading a the richest earnings multiple in more than 10 years:

From Bloomberg
From Bloomberg

MY VIEW:  I wouldn’t buy this stock here with your money into the print.  In hindsight, $110 was a great buy during that consolidation, but I worry that the stock is priced for perfection at a time where sentiment is white hot. You could have said the same thing prior to earnings in early May, but at this point, with market breadth very weak, and some leadership like AAPL in a correction I think it makes sense to be cautious committing new capital to cult stocks like DIS at all time highs.  The risk reward for longs gets worse every tick higher.

Hypothetical Trades vs DIS at $122:

Bullish – Stock Alternative/replacement:

Buy the Sept 120/130/140 call fly for $3

Rationale: Defining our risk. This trade targets a continuing breakout up to the $130 level while capping your potential losses to just 2.5% of the underlying if the report is the catalyst for a correction.



Buy the August 120/115 put spread for 1.25

Rationale: If the stock does pull back on the report 115 is a good area to target as it’s just above the 50 day moving average of 114.50. The put spread offers a decent risk reward on what wouldn’t be much of a move due to implied vol being fairly cheap


Protection against long stock:

Buy the August 7th (weekly) 120 puts for 1.25

Rationale – for about 1% of the underlying you can have unlimited protection into the event with a breakeven at 118.75. Any large moves lower, especially one that violates that 50 day moving average of 114.50 and you’ve locked in most of your gains. If the stock goes even higher you will have been able to hold onto your shares through the binary event with out much of a loss from the hedge.


Estimates From Bloomberg:

* 3Q adj EPS est. $1.41 (range $1.24-$1.55)
* 3Q rev. est. $13.22b (range $12.96b-$14.26b)
* Segment rev. ests. (avg of 4):
* Media $5.72b
* Parks & Resorts $4.25b
* Studio Entertainment $1.96b
* Consumer Products $960m
* Interactive Media $257.5m
* 3Q segment OI ests. (avg of 4):
* Media $2.43b
* Parks & Resorts $949.75m
* Studio Entertainment $398m
* Consumer Products $312.5m
* Interactive Media $32.3m