Name That Trade – $DIS: Sith Kabob

by CC September 25, 2015 2:27 pm • Commentary

We have written a lot on Disney (DIS) since their fiscal Q3 earnings report on August 4th, which was ultimately the catalyst for a peak to trough decline over the next 20 days of 26%.  On August 21st, prior to the flash crash, we opined that DIS could set up as a good put sale candidate for those looking to place a so called good til cancel bid (below the market) in the stock:

And DIS, WTF? This stock was unstoppable, ESPN, Star Wars, Avengers, Parks, blah blah blah, all fine in good until they suddenly weren’t. Not much has changed aside from Netflix, are you kidding me? The unwind in the positive DIS sentiment suddenly seems endless. Except the stock did reverse its early losses today, and may find support at $100.  But if it doesn’t, $90.01 is my good till cancel bid, maybe that turns into $95.01 in the coming days. ¯\_(ツ)_/¯

DIS 2yr chart from Bloomberg


DIS at $99.95, sell to open Oct $90 put at $1.50, stock above $90 you receive $1.50, stock below $90 and you are put the stock at $90 on Oct expiration, but less the $1.50 in premium, or $88.50.   Again, not a bad way to put in a good till cancel limit buy order, paid to do so.

DIS did in fact go to $90 on Aug 24th, and while that might have been a scary couple of minutes if you were short Oct 90 puts, the strategy was actually a decent one as the puts that could have been sold at $1.50 on Aug 21st when the stock was $100 are now offered at 25 cents.  If you were patient and waited for the collapse of Aug 24th and employed this strategy then it was a home-run.

Regular readers know that we remain cautious on committing new money to equities, and we are generally very cautious on the not only global equities but think there is a strong chance that the S&P 500 (SPX) soon breaks its Aug 24th low of 1867 and likely re-tests its October 2014 lows near 1820 in the coming months.  And to be very clear on DIS, we think the stock’s performance this month is less than encouraging and we could see a the stock back in the mid $90s if we are correct and the SPX makes fresh lows.  We have written about this view on a couple occasions over the last few weeks:

MorningWord 8/31/15: A Subtle $DIS

Name That Trade – $DIS: Let it go

Name That Trade – $DIS: You must be this high to ride

So notwithstanding our overall bearish view, and the fairly week technical set up in the near term there is one massive fundamental catalyst for DIS and that’s the December 18th release of Star Wars Episode VII, The Force Awakens. It happens to fall on Dec expiration day.

For those who are long the stock or were thinking of entering here, but feel (as we do) about the broad market, and the fairly poor price action in DIS (and the entire media sector), then it could make sense to express a bullish view by widening the bands in which you would suffer losses on the downside, which also means forgoing some near term gains.

If we were long, share the above views, but think the build up to Star Wars on Dec 18th will be a catalyst, then using elevated levels of implied vol in DIS to get leverage to an upside move makes sense.

Hypothetical Trade: DIS ($101) Buy Dec 90 / 110 Risk Reversal for a 20 cent credit

-Sell to open 1 Dec 90 put at 1.65

-Buy to open 1 Dec 110 call for 1.45

Break-Even on Dec Expiration:

Profits: of 20 between 90 and 110, gains one for one above 110

Losses: below 90, put the stock and lose one for one

Rationale:  This is NOT a trade we are initiating to express a bullish view. But for those who are long, this could make sense to replace some existing long exposure.  The options market is suggesting that the 90 put and the 110 call have about a 20% chance of being in the money on Dec expiration, so the likely hood of big gains or losses are not great, but the strategy should be considered for the purposes of mitigating potential risk.

Here are the levels we are focused on and helping to inform our choice of strikes:

DIS 1yr chart from Bloomberg
DIS 1yr chart from Bloomberg