Trade Idea – $TWX: Looney Swoons

by Dan November 4, 2015 2:19 pm • Commentary

Time Warner (TWX) reported Q3 results this morning and issued forward eps guidance for 2016 that was below expectations, the stock is down 7% (was down 10% at its lows). Lowlights from Bloomberg:


Prior to this morning’s guide down, Wall Street consensus was calling for about 20% year over year eps growth for TWX, its largest increase since 2011’s 20% growth, since then it has been between 15 and 10%.  TWX now trades at about 13.5x its expected 2016 eps growth of about the same.

It seems all at once, or at least since mid Summer when most media stocks were trading at all time highs, the ground has shifted below its feet on how consumers are digesting content. To be fair this has been going on for quarters, if not years, as companies like Netflix (NFLX) have been disrupting what had been a fairly predictable status quo. But it was the acknowledgement by old school C level media execs this Summer of secular shifts that sent investors running.   I suspect that the 6.25% cut to next year’s adjusted eps (relative to prior consensus) could be the first tweak lower, which is why the stock is down more today than the % eps cut.

TWX is now down 17% on the year and down 22% from its July 16th all time high.  $70 is important near term technical support, and below the August lows there is little support till the low $60s:

TWX 5 year chart from Bloomberg
TWX 5 year chart from Bloomberg

What’s clear is that the five year uptrend is broken, and the stock needs to find some footing in and around $70.

Short dated options prices were elevated into the print, and given the stock’s sharp move today they are likely to remain bid as uncertainty persists.  30 day at the money implied volatility is at 28.5%, which is actually below its 90 day realized volatility of 32% and the 180 day realized of 25%, which is well above the 2015 low print of 16% in late June.  Options prices seem fair given the stock’s volatility since its highs, and the likelihood of continued movement in what is emerging as a very controversial sector in the stock market:

TWX 1yr chart of 30 day at the money implied vol from Bloomberg
TWX 1yr chart of 30 day at the money implied vol from Bloomberg

So whats the trade? Despite the fundamentals apparently in flux, and the technical set up less than stellar, the stock is a tough press on the short side.   If I were inclined to play for lower lows, I would like target the Sept 29th low of $65:

TWX ytd chart from Bloomberg
TWX ytd chart from Bloomberg

If were inclined to play from the long side, I would target a bounce back to $80 in the coming months. Because near term vol is still pumped from the move lower calendars make sense:

Bearish Directional:

Buy the Nov/Jan 67.5 put calendar for 1.25

Bullish Directional:

Buy the Nov/Jan 75 call calendar for 1.15

Rationale – Both of these trades take advantage of elevated Nov vol that hasn’t come in after earnings because of the sharp move lower in the stock. Financing out into January by selling a Nov strike leaves you with a fairly dollar cheap directional position that can then be turned into a vertical after November expiration. Both of these trades are selling Nov vol in the low to mid thirties and buying vol in January in the mid to high 20’s. Ideally, you’d want the stock to settle here then begin to creep towards the strike into November expiration.