With the S&P 500 (SPX) on the doorstep of making new all time highs, traders are scrambling to find stocks that could play catch up. Disney (DIS) is a stock that might be worth keeping an eye on for a couple of reasons. First and foremost, the stock is down 18% from its 52 week and all time highs made last Summer, and while the company faces their share of secular headwinds in their core broadcasting business, investors will look to their upcoming fiscal Q3 results on August 9th as chance for the stock to play some catch up to the broad market.
The one year chart below shows DIS approaching the nice round number of $100. It also coincides with a downtrend. If it were able to break above that downtrend it has little overhead resistance:[caption id="attachment_64870" align="aligncenter" width="600"] DIS 1yr chart from Bloomberg[/caption]
But on a longer term basis, the stock chart could be at a technical inflection point if it were to fail at the downtrend, making another lower high, with the potential for a retest of the February lows in the mid to high $80s:[caption id="attachment_64871" align="aligncenter" width="600"] DIS 5yr chart from Bloomberg[/caption]
DIS is a premium brand that deserves to trade at a premium valuation to the broad market, and its peers. DIS’s earnings multiple has come down considerably in the last year, to just over a market multiple for the current fiscal year at about 17x and about 16x expected fiscal 2017, but still fairly rich to Time Warner (TWX) at 13x.
Short dated options prices are very near 52 week lows, with 30 day at the money implied vol at about 15%:[caption id="attachment_64872" align="aligncenter" width="600"] DIS 1yr chart of 30 day at the money implied volatility from Bloomberg[/caption]
With the stock at $99.50, the Aug 12th weekly 99.50 straddle (the call premium + the put premium) is offered at $4.65, or about 4.7%, implying that movement, including their earnings event between now and the close of August 12th. This seems pretty fair when you consider that the stock has moved about 5% on average over the last 4 earnings events, and the 10 year average one day post earnings move is about 3.5%.
For those looking to pick a direction between now and then, paying about 2.3% in the form of the at the money call or put for the right to own or sell DIS in a month seems downright cheap compared to the stock. On any move from $100 into earnings that put or call could be spread to reduce premium risk. With August 12th options capturing earnings the likelihood of losing a lot of premium on decay is greatly reduced in what’s likely to be an uptick in implied volatility (options prices) in that expiration into the event.