Splash, Mountain – Disney (DIS)

by riskreversal January 9, 2017 1:00 pm • Trade Ideas
For CNBC’s Options Action on Friday, I was asked to come up with a stock replacement idea for a Dow Jones Industrial Average (INDU) competent that might have gone too far too fast. The idea with a stock replacement strategy is that you have realized near term gains beyond your original goal and while you might remain optimistic of the stock’s prospects, you are placing a greater emphasis on risk/reward after profits, leading you to better define your risk at what might be extended prices.  Here were my notes from Friday afternoon:
Shares of DIS closed down 2016 less than 1%.  In 2016 the stock is up nearly 5%, and up 21% in nearly a straight line from its mid Oct lows, this week breaking out to a new 52 week high:
The next identifiable catalyst for DIS will be their fiscal Q1 results due the first week of Feb. If the market were to continue to grind higher, and the company were able to print a solid Q1 and offer guidance above expectations, traders will be gunning for this stock to challenge the prior highs just above 122 from Aug 2015:
[caption id="attachment_69358" align="aligncenter" width="600"] Bloomberg[/caption]
That said, if the market hit a post inauguration speed-bump, and the company misses and guides down, this stock will likely be right back towards $100 on the downside.
Short dated options prices are relatively low with 30 day at the money implied volatility just below 20%, while the June 120 calls are trading just below 18%:
[caption id="attachment_69359" align="aligncenter" width="600"] Bloomberg[/caption]

If you are long DIS you might consider long stock replacement:
Why Stock Replacement?
1. Book profits, but
2. Stay in the game, while also
3. Defining risk
Trade Idea: DIS ($109) Buy Feb 110 / 120 call spread for $2.30
Profits: up to 7.70 between 112.30 and 120, max gain of 7.70 above
Losses: up to 2.30 between 110 and 112.30
Rationale: risk 2% of stock price to make up to 7% between now and Feb expiration which captures earnings
Which leads me to some unusual options activity in DIS today… Call volume is running hot in today’s trading, 5x that of puts as I write and it appears traders are selling to close Jan and Feb 110 calls and rolling out and up. The two most active options are 15,000 of the Feb 110 calls and 11,000 of the Jan 110 calls. There was one large trade that caught my eye. When DIS was trading $108.73, a trader sold to close 10,000 Feb 110 calls at $2.32 and bought to open 10,000 of the June 120 calls for $1.63. This new position breaks-even at $121.63 on June expiration, about 1% below the all time highs made in August 2015.