Event: Disney reports fiscal Q4 results tonight after the close. The options market is implying about a 4.5% one day move, or about $5 in either direction, which is basically inline with the average over the last 4 qtrs of about 4.75%.
Price Action / Technicals: From August 4th to August 24th, DIS declined 26%, and has since rallied back 26%, but still down about 8% from its all time highs made in early August.
As for the chart, overhead resistance is obviously at the prior highs, just above $120, while the next real support level is down closer to $100, back towards the uptrend that has been in place since the lows in 2011:[caption id="attachment_58291" align="aligncenter" width="600"] DIS 5 yr chart from Bloomberg[/caption]
Volatility and Open Interest Snapshot: Short dated options prices have ticked up of late to levels well above the last few quarterly reports, with 30 day at the money implied vol at 30%:[caption id="attachment_58293" align="aligncenter" width="600"] DIS 1yr chart of 30 day at the money IV from Bloomberg[/caption]
As options prices have ticked up, so has total volume, causing open interest to again approach 52 week highs:[caption id="attachment_58292" align="aligncenter" width="600"] DIS 1yr chart of total options volume and open interest from Bloomberg[/caption]
For comparison sake, Time Warner (TWX), who shares are down 10% in the last two days after giving disappointing forward guidance has see options prices remain elevated post results, with 30 day at the money IV also about 30%.
My View: DIS shares trade very near a 10 year high on a trailing basis. Prior to TWX’s guide down for 2016 earnings, like DIS, consensus estimates were calling for $5.60 a share. TWX’s 6.25% guide down to $5.25 for 2016, as stated above has caused a 10% decline in the stock. If DIS were to similarly take a swipe at consensus eps, I would expect the stock to act very similarly to TWX, especially when you consider the stock has re-traced a good bit of the August move. On the flip-side, a beat and raise, proving a slowdown at ESPN was a one time thing (for now) then the stock will easily re-test the prior highs as we head into the Dec 18th release of Star Wars.
Stock Alternative/ Replacement:
Buy the DIS ($112.50) December 100 put 115/125 call spread risk reversal for 1.45
- Sell 1 Dec 100 put at 1.05
- Buy 1 Dec 115 call for 3.15
- Sell 1 Dec 125 call at .65
Rationale – This gives you a breakeven to the upside of 116.45, above that and to 125 it will act like stock into December earnings. Its breakeven on the downside is 101.45, so it provides a downside range where there is no harm no foul. Below 100 and you are put the stock, therefore this is a trade for those that don’t want the entirety of near term risk of an earnings miss, but would like to participate if the stock moves back towards highs into December expiration (and the release of the new Star Wars)
Hedge vs. long stock:
Buy the DIS ($112.50) November 105/119 collar for even
- Buy 1 Nov 105 put for 1.00
- Sell 1 Nov 119 call at 1.00
Rationale – Even though DIS is off its recent highs it’s still up 20% on the year. For those long the stock as a core holding it makes sense to hedge the position given the reaction we saw to TWX recently. This collar caps potential gains near recent highs so one must be willing to give up that potential for new highs. But at the same time it caps losses on any disaster that sees the stock make a move to 100 or worse.
Buy the DIS (112.50) Nov6th Weekly 110 put for 1.45
Rationale – If DIS pulls a TWX you would want dollar cheap event puts. Implied vol is high but the 110 weekly put would see profits with the stock at or below its 200 day moving average (around $108). This trade can also serve as a hedge vs long stock for those willing to lose 1.45 in order to stay in the stock.
Estimates from Bloomberg:
* 4Q adj EPS est. $1.14 (range $1.00-$1.31)
* 4Q rev. est. $13.56b (range $13.04b-$14.06b)
* 4Q segment rev. ests. (avg of 4):
* Media $5.65b
* Parks & Resorts $4.33b
* Studio Entertainment $1.79b
* Consumer Products $1.25b
* Interactive Media $405.3m
* 4Q segment OI ests. (avg of 4):
* Media $1.71b
* Parks & Resorts $812.5m
* Studio Entertainment $306m
* Consumer Products $481m
* Interactive Media $33.3m