Event: Disney (DIS) will report fiscal Q3 results tonight after the close. The options market is implying about a 3.3% one day post earnings move which is well below the 5% four qtr one day average post earnings move, and basically in line with the 10 year average of 3.45%. With the stock at $96, the Aug 12th weekly 96 straddle (the call premium + the put premium) is offered at $3.20, if you bought that, and thus the implied move, you would need a move above $99.20, or below $92.60 to break-even on Friday’s close, or about 3.3% in either direction.
Price Action / Technicals: Shares of DIS are down about 8.5% on the year, and down about 20% from its all time highs made about a year ago on the close just prior to the company’s disappointing fiscal Q3 2015 report. The stock has been in a massive downtrend since, making three lower highs and two lower lows before forming what appears to be a technical support range between $90 and $95:
But don’t take my word for the technical set up, on Friday’s Options Action on CNBC, my co-panelist Carter Worth of Cornerstone Macro Research detailed what he sees as a wedge that will likely resolve itself in one way or the other in dramatic fashion, as he calls it a “perfect standoff” between bulls and bears and thinks the resolution could be 50 /50 up or down:
The five year chart is quite interesting, as the S&P 500 (SPX), of which DIS is a large component is at new all time highs, the stock has not kept pace, and importantly is below the long term uptrend:
What might be most interesting about the technical set up into the print might be the fact that with the stock at $96, it is nearly at the exact mid point of the 2016 range with the low at $86 very briefly back in February following their fQ1 results, and its highs at $106 in May just prior to its fQ2 results:
My other co-panelist on Options Action, the Professor, Mike Khouw agreed with Carter’s technical take, thinks the implied move in the options market appears cheap given what he feels is not only technical tension, but also for the potential of either a reversal or acknowledgment of some negative fundamental trends. Any positive surprises on the fundamental front could cause the sort of counter-trend relief rally we have witnessed in Apple (AAPL) since their report on July 26th, or in the event of another weak quarter and guidance that confirms adverse trends to DIS’s media business could cause another leg lower. Mike detailed a trade that “buys the move” in August expiration, as he thinks the options market might be underpricing the potential post earnings movement:
— Options Action (@OptionsAction) August 5, 2016
My View on the Trade Idea: If you were very convicted that the stock was going to move in line (or greater) with the last 4 qtr average, but unsure as to direction, than this defined risk options trade makes sense. Its important to note that the greatest likelihood for a trade like this is that it will loose a little money as the highest probability outcome is that the stock will be within the straddle range. The lowest probability outcome is that the stock will be significantly higher or lower than the break-even levels (the atm strike plus the premium of the straddle), while the disaster scenario is the stock is right at $96 on Aug expiration and the owner of the straddle would lose all of the premium.
My View into the Print:
I guess the most important thing for those considering owning a move into a potentially volatile event, without picking a direction is being mindful of our usual disclaimer for long premium directional trades into earnings, “you need to get a lot of things right, direction, timing and magnitude of the move”. Obviously the size of the move and the timing of said move are the things to focus on for a long straddle, but for getting relief for having to get the direction right you are doubling your premium at risk. This is the main reason why this is generally a poor event trading strategy, especially for those who are not inclined to scalp their deltas as the stock makes short term moves prior to earnings.
In this instance though, given the performance of DIS peers like Time Warner (TWX), up 23% on the year, and at its 2016 highs, the broad market price action, the price action of a once loved but recently left for dead AAPL since its results, the technical tension, and the potential for an upside surprise on the one year anniversary of the identified problems in its Media Networks division last August, it could make sense to own the move, or lean long.
Here are a couple alternatives depending on ones directional inclination (dissecting the straddle could be the play), or a hedge against a long current:
Bullish – in lieu of long at $96:
If you think the move is cheap, and the stock could bounce back above $100 and eventually fill in the Q2 earnings gap from early May, then the Aug 96 call offered at $1.67, or about 1.7% of the stock price appears to be dollar cheap, offering a break-even at $97.67.
Bearish – in lieu of short at $96:
If you think the move is cheap, and that the company will offer disappointing fQ4 guidance and the stock breaks near term support at $95 and trades back towards the lower end of the support band at $90 in the coming weeks, then the Aug 96/92 put spread offered at about $1.20 might be attractive. Offering a break-even at $94.80 with a max gain of $2.80 at $92.
*Generally for a directional play it makes sense to avoid weekly options as it places a far greater emphasis on timing and direction.
Hedge against long at $96:
But if I were long 100 shares of DIS at $96 and worried about the potential for a move back to $90 on a miss and/or guide down on tonight’s call, I might consider as a hedge buying the Aug 12 weekly 96 put for $1.60, offering protection below $94.40 between now and Friday.
Estimates & Forecasts from Bloomberg:
-3Q adj EPS est. $1.61 (range $1.54-$1.69)
-3Q rev. est. $14.16b (range $13.84b-$14.49b)
3Q segment rev. ests. (avg of 4 complied by Bloomberg):
Media networks $6.0b
Parks & resorts $4.42b
Studio entertainment $2.61b
Consumer products & interactive media $1.20b
3Q segment OI ests. (avg of 4 complied by Bloomberg):
Media networks $2.40b
Parks & resorts $894m
Studio entertainment $690m
Consumer products & interactive media $371m