MorningWord 3/30/17: Alternative Rock (DIS)

by Dan March 30, 2017 9:35 am • FREE ACCESS

Disney’s (DIS) stock is in striking distance of its all-time highs made in early August 2015 near $122, about 8% away, and up a whopping 25% from its 52-week lows made in mid-October. Given the broad market’s amazing resilience, the recent extension of CEO Bob Iger’s contract and the fairly well-known and priced in challenges in their Networks business, specifically at ESPN, it’s hard to argue that if the S&P 500 were to make new highs in the coming months and continue higher that DIS would not be once again threatening a breakout as we have see of late in Apple (AAPL):

Bloomberg

At least one trader was playing for higher highs and possibly a new all-time high yesterday, apparently rolling out a call position up and out.  When DIS was trading $112.54 late in the afternoon a trader sold to close 25,000 June 115 calls at $2.20 (or $5.5 million in premium) and bought to open 35,000 Oct 120 calls for $2.55 (or $8.925 million in premium). The next identifiable catalyst for DIS will be its fiscal Q2 earnings on May 9th after the close.

Short-dated options prices are cheap as chips in DIS with 30 day at the money implied volatility very near 52-week lows at 12.5%, while the out of the money calls traded at a 15% very near the mid-point of the 52 week range:

Bloomberg

The main takeaway is that options prices are basically begging to be used as long stock alternatives for those looking to better define risk over the coming months, or in this case possibly add leverage to an existing long stock position.

And that’s a lesson that can be applied across most of the broader market right now. If you’re in a stock or looking to take a shot in a stock and it’s nearing its highs, that chart probably looks scary, especially since the election. Defining risk with stock alternatives or protecting profits with low cost (or even zero cost) hedges at this low a cost is rare historically. If stocks continue to stream higher you can participate without taking profits, if stocks reverse, it’s like a stop loss.

It’s unclear until hindsight whether bullish sentiment in the market was “euphoria”. But complacency is obvious as it’s happening.