Time Warner (TWX) – For the Watch

by riskreversal October 18, 2016 3:34 pm • Trade Ideas

Shares of Time Warner have massively outperformed (up 23%) the broad market year to date (SPX up 5%), and peer Disney (DIS, down 13%). The stock caught my attention for a couple of reasons today. First with Netflix (NFLX) up 20% after better than expected subscribers, the stock now sports a market cap of nearly $51 billion, $11 billion less than TWX, despite the fact that TWX will book $29 billion in sales in 2016 vs NFLX’s expected $8.7 billion. I know, I know NFLX sales are expected to grow 30% year over year vs TWX at 3%, but NFLX is only expected to book $168 million in GAAP net income vs TWX’s expected $4.5 billion. If we were playing would you rather, I’d much rather own TWX here than buy NFLX (had some thoughts on NFLX this morning here). TWX trades at 14.7x expected 2016 eps growth of 14%, below a market multiple, has a dividend yield of 2% and a $5 billion share buyback in place.

There appeared to be a bullish roll in calls today where a trader closed out of a block of what are now deep in the money calls and using some of the gains to roll up.  When the stock was $79.60 in the afternoon, a trader sold to close 7,500 Jan 72.50 calls at $8.13 ($6.1 million in premium) and bought to open 15,000 Jan 82.50 calls for $2.04 ($3.06 million in premium).

TWX ytd chart is fairly constructive to my eye, since early July trading between $75 and $80, with the recent consolidation just below the 2016 highs:

TWX ytd chart from Bloomberg
TWX ytd chart from Bloomberg

The next identifiable catalyst for TWX will be their Q3 results on Nov 2nd. The options market is pricing in about a 5% move in either direction between now and Nov 4th close, which seems hefty, but the stock on average has moved above 4% following the last 4 quarterly reports, which is above their 10 year average one day post earnings move of 2.65%.

So what’s the trade?

For those inclined to play for a breakout as the trader who rolled the Jan calls up might be doing, you might consider calendars. Financing owning calls in Nov for the earnings event by selling shorter dated upside calls. For instance, the 81.50 calls expiring Oct28th before earnings can be sold for around .30 and the Nov4th calls that capture earnings can be bought for about 1.20. The net risk on the trade is .90 and if the stock is below 81.50 on Oct 28th the Nov4th calls can be spread into a vertical call spread into the event.