$DIS – It’s A Vol World After All

by Dan May 24, 2016 2:42 pm • Commentary• Trade Ideas

In my preview of Disney’s (DIS) fiscal Q2 earnings on May 10th, when the stock was $106, I saw very few scenarios where the stock would rally after the print:

The 11% bounce in the stock in the last month might discount any and all good news near term.  Investors know that their movie studio has been killing it, and that Parks have been strong, but there seems to be considerable debate over the severity of subscriber losses and advertising revenues lost associated with over the top offerings/cord cutters.  Commentary about Media division and these trends will drive the stock.

It’s my view that it won’t just take a beat and raise to get the stock going materially higher than the implied move.  With earnings out of the way for media peers like TWX and CBS, I think it is safe to say that a huge surprise is not in the cards.

The stock declined 4% the following days as the quarter came in below consensus with a fairly lukewarm outlook, and is now down about 6.5%, from what was the 2016 high made on the eve of earnings:

DIS ytd chart from Bloomberg
DIS ytd chart from Bloomberg

$100 certainly appears to be a sort of physiological support / resistance level.  With the stock at current levels, it trades about 17x current consensus 2016 eps estimates, just a tad above the multiple of the S&P 500 (SPX), probably a valuation level that investors would concede is about appropriate when you consider the headwinds to their media business, and the apparent tailwinds of their studio and park’s businesses.

The company will not report their next earnings till the first week of August, and short dated options prices are once again approaching 2015 lows, with implied volatility at 16.5%:

From Bloomberg
From Bloomberg

If you thought that shares of DIS could have the sort of sentiment shift that resulted in a nearly 8% rally in Apple (AAPL) in the last 7 trading sessions, you might want to consider short dated call spreads, or call butterflies.  

For instance, with DIS at $99.70, you could target a move back towards $105. If the stock were to fill in the earnings gap, buying the July 100 / 105/ 100 Call Butterfly for $1.25, or a little more than 1% of the stock price:

-buying one of the July 100 calls for $2.25

-selling two July 105 calls at 55 cents each, or $1.10 total

-buying one of the July 110 calls for 10 cents

This trade breaks-even at $101.25, with a max gain of $3.75 at $105, and gains of up to $3.75 between 105 and $108.75. The max risk of the trade is $1.25 below $100 or above $110 with losses of up to $1.25 between $100 and $101.25 & between $108.75 and $110.


It was this 5 year chart in DIS that I highlighted that suggests that the trend may still be lower, as long as the company’s fundamental’s remain in transition, and the stock continues to trade at a premium to the market and its peers.  Which is one of the big reasons why it may make sense to express a bullish contrarian view with defined risk:

[caption id="attachment_63881" align="aligncenter" width="600"]Snip20160524_2 from Bloomberg[/caption]

A continuation of the trend channel would put the stock back in the low $80s.  For those who think this is the way to go targeting fiscal Q3 earnings in early August, put calendars could be the way to isolate the earnings event. 

For instance, with DIS at $99.70, you could sell the July 95 put at $1.20 and buy the August 95 put for $2.30, the July / August 95 strike put calendar would cost $1.10, or about 1% of the stock price, not a bad way to finance out of the money puts targeting an event.  The ideal scenario is that the stock works lower between now and July expiration, with the short put expiring worthless, offsetting some time decay in the August puts that you are long, while they also picked up some deltas as they got closer to the 95 strike. At this point you could once again sell a put of the same strike in a weekly expiration, or sell a lower strike put making a vertical put spread for the earnings event if you still wanted to be there for the event.

In either trading scenario risk is being defined, to the upside, or the downside. And in the case of the the bearish calendar that could be one way to work into a hedge isolating the earnings in August.