Disney (DIS) will report their fiscal Q4 results after the close. The options market is implying about a 5% one move tomorrow in either direction, which is rich to the average one-day post-earnings move of about 2.25% over the last 4 quarters, but well above the 10-year one-day post earnings average of about 3.3%.
Shares of DIS are down 1.5% year to date, vs the S&P 500 (SPX) up about 15% on the year. Despite its poor relative performance in 2017, the stock is up 4% this week on reports that the company is considering buying assets from Twentieth Century Fox (FOXA), but still down about 11.5% from its 52-week highs made in April.
Near-term the stock is banging up against the downtrend from the April highs:
Taking a longer-term view, the stock has technical resistance just above $110 at the downtrend from the all-time highs made in 2015, and support in the low $90s:
From purely a technical standpoint to my eye, the stock is in no man’s land.
ESTIMATES & FORECASTS FROM BLOOMBERG
* 4Q adjusted EPS est. $1.14 (range $1.07 to $1.30)
* 4Q revenue est. $13.32b (range $12.75b to $14.87b)
* 4Q segment rev. ests. (avg of 4 compiled by Bloomberg News):
** Cable networks $4.0b
** Broadcast networks $1.63b
** Media networks $5.62b
** Parks & resorts $4.53b
** Studio entertainment $1.52b
** Consumer products & interactive media $1.32b
* 4Q segment OI ests. (avg of 3 compiled by Bloomberg News):
** Cable networks $1.27b
** Broadcast networks $254m
** Media networks $1.60b
** Parks & resorts $911m
** Studio entertainment $375m
** Consumer products & interactive media $452m
This week’s gains clearly speak to investor’s comfort level with the rumored discussions to acquire some studio assets from FOX, despite the so-called talks now rumored to be off. The recent strength obviously raises the risk of post earnings disappointment as the company is likely to report results that show a continuation of the subscriber losses that have plagued the stock for two years, but the company is also likely not comment on the rumored FOX talks which could cause some fast money to come out of the stock tomorrow.
So what’s the trade?
If you are inclined to think the stock could see some short-term weakness, in line with the implied move, retracing all of this week’s gains then you might consider the following defined risk strategy:
Bearish Trade Idea: DIS ($103.15) Buy Nov17th 103 / 96.50 put spread for $2
-Buy to open 1 Nov17 103 put for 2.50
-Sell to open 1 Nov17 96.50 put at 50 cents
Break-Even on Nov17th expiration:
Profits: up to 4.50 between 101 and 96.50 max gain of 4.50 below 96.50
Losses: up to 2 between 101 and 103, with max loss of 2 above 103
Rationale: this trade idea risks about 2% over the next 6 trading days capturing a potentially volatile event. Ill offer my usual disclaimer for long premium trades into events, you need to get a lot of things right not to lose at least a little or most of your premium at risk, timing, the magnitude of the move and most importantly direction.
Or If you are inclined to a beat and raise coupled with news on the M&A front which investors clearly already seem keen about it might make sense to look to play for a rally back towards the downtrend in the low teens:
Bullish Trade Idea: DIS ($103.15) Buy Dec 105/ 115 call spread for 2.30
-Buy to open 1 Dec 105 call for 2.80
-Sell to open 1 Dec 115 call at 50 cents
Break-even on Dec Expiration:
Profits of up 7.70 between 107.30 and 115, with max gain above 115
Losses of up to 2.30 between 105 and 107.30 with max loss below 105.