Yesterday I did a short preview on Disney’s fiscal Q1 results due out after the close:
Event: Disney (DIS) will report fiscal Q1 results tonight after the close. The options market is implying about a 5.5% one day post earnings move, which is rich to the 4.75% 4 qtr average move, and the 10 year average of about move 3.3%. With the stock at $90, the Feb 12th weekly 90 straddle (the call premium + the put premium) is offered at $5.70, if you bought that, and thus the implied move, you would need a move above $95.70, or below $84.30 to break-even on Friday’s close. The one day implied move is a little less than the weekly.
Technicals: The one year chart is fairly fascinating, the low for 2015 was put in early February at $90, prior to the stock’s 35% rally to its early April highs. During the market’s meltdown in August the stock made an intra-day matched low at $90, before once again bouncing off of that nice round number and rallying 34% into early November before round-tripping the entire move back to $90:
DIS 1yr chart from Bloomberg
Taking a longer term view from DIS’s financial crisis lows, the stock has clearly broken trend, possibly having made an epic double top near $120:
DIS 8 year chart from Bloomberg
I would add that options prices in DIS are once again approaching levels not seen since late August and the stock’s grind lower over the last few months, with the stock back at 52 week lows, makes today’s prices that much worse than August as that was a full on panic:
From Bloomberg
Longs might consider call sales against stock, and those looking to express a directional view might consider short premium trades. For instance if you thought DIS was going to meaningfully break below the long term uptrend after tomorrow’s results, you might consider selling a call spread to finance the purchase of a put spread to help offset expected vol crush after earnings.
Now I want to offer my view into the print and offer some ways to play depending on your directional inclination, or current positioning:
MY VIEW: the issues dogging DIS since its Q3 report in early August are not likely to have shifted much in the last couple months. But down nearly $30, or 25% since early November and nearing the 52 week lows clearly places the stock in oversold territory. The slightest good news and the stock rallies. But I suspect that any rally is sold if it is merely based on relief.
Bullish: If the company guides expected fiscal 2016 earnings of $5.66, growing 10% year over year in line or higher, then the stock trading 16x, just over a market multiple, at the mid point of the last 5 years, makes valuation look fair to cheap. In this scenario of a beat and inline guidance the stock probably rallies 3-6%. But I’d be surprised if it could build much on that, and if the market does not stabilize would expect the bounce to be sold.
Potential Bullish/ Stock alternative trade: If I were inclined to play for a bounce, and a move back to technical resistance at $100, I might consider and in the money call butterfly to help offset expected post earnings decay.
DIS ($91) Buy March 90 / 100 / 110 Call Butterfly for $3
- Buy 1 March 90 call for $5.05
- Sell 2 March 100 calls at 1.10 each or $2.20 total
- Buy 1 March 110 call for 15 cents
Break-Even on March Expiration:
Profits: gains of up to 7 between 93 and 107, with max gain of 7 at 100
Losses: up to 3 between 90 and 93 & between 107 and 110, max loss of 3 below 90 and above 110
OR
Bearish: If the company reports a slight miss, and soft guidance then the stock is probably down in line with the implied move of 5 to 6%. If the company has a meaningful guide lower, or reports metrics that confirm negative trends in their cable networks, then the stock will be on its way back to technical support near $80 in the coming days/weeks.
Potential Bearish trade: If I were inclined to play for a break-down of 1 year support at $90, But in line with the implied move, I might look to finance longer dated puts by selling weeklies.
DIS ($91) Buy Feb 12th weekly / April 85 Put Spread for $1.80
- Sell to open 1 Feb 12th weekly 85 put at .95
- Buy to open 1 April 85 put for 2.75
Break-Even on Feb 12th weekly expiration:
Profits: Max gain at $85, at $85 or higher the weekly put expires worthless and you own the April for $1.80 If the stock were to come in closer to the 85 strike then the change in delta and the short Feb put should off set expected post earnings vol crush.
Losses: Any move higher or a massive move lower (way through the 85 strike) means this trade is a loser, but the most that can be lost is what is paid for (1.80).
Or
Alternative Bearish Trade targeting immediate breakdown with a possible 10% decline (VIA is down 12% today following results).
DIS ($91) Buy Feb 12th weekly 90/80 put spread for $2
-Buy to open 1 Feb 12th weekly 90 put for 2.25
-Sell to open 1 Feb 12th weekly 80 put at 25 cents
Break-Even on Feb 12th weekly Expiration:
Profits: between 88 and 80 of up to 8, max gain of 8 at 80 or below
Losses: up to 2 between 88 and 90 with max loss of 2 above 90
Rationale: You would only do this if u were convicted that the stock would breakdown following results. As we often state, long premium directional trades are a tough way to make money into events as you need to get a lot of things right to just break-even, like timing, direction and magnitude of the move.