Disney Unusual Option Activity Report
Walt Disney Co (NYSE: DIS) is still searching for a resolution to the closure of their California park. That hasn’t dissuaded investors and the option market from taking bullish trading opportunities. Although the ride has been as crazy as Mr. Toad’s Wild Ride, it has proven profitable.
As the price edges back towards the 52-week high, the option market saw a large bullish bet made on Disney for a rally by the end of the year.
Disney Option Activity
Disney finished 0.55% higher on Tuesday’s session. The price is looking to find support after it closed the bullish gap on October 13. The option volume was uninspiring at just below 50% the average. The volume was also pretty evenly split between being filled at the bid, ask or in between the market.
That being said, there was a significant trade that was made and filled in one print. With nearly two hours to go before the close, an 8,700-contract order got filled in one print. Here’s the details:
- 8,700 18 DEC 20 $140 call BOT @ $2.23
- 8,700 18 DEC 20 $155 call sold @ $0.63
Putting those two legs together creates a bullish trade that is called a long call vertical. On TheoTrade, we have an entire 3-hour class on trading a strategy like this.
This trade maximizes its return in the price closes above $155 by December’s expiration. At a $1.60 cost for the vertical, the max gain is $13.40 by December’s expiration. That means this trade is expecting DIS to close at a new 52-week high before the end of the year! If that happens, the trade will make $1340 per contract for only $160 of risk per contract.
Disney Earnings
I know what you must be thinking about Disney. You’re thinking that delayed movies and closed parks is bearish. While you’re right, you’re also missing some of the transition that Disney made by creating a subscription service and other measures they recently announced.
In the last quarter, revenue declined 41.72% from the prior year according to Yahoo! Finance. That’s huge, but the company was on a roll leading into that quarter. To put that in perspective, current revenue projections for fiscal year 2020 is $65.02 billion. That number is only a 6.5% decline from 2019 revenue of $69.57 billion. The average analyst estimate for 2021 is $71.18 billion. While COVID hit Disney hard, it’s not permanent.
As you look at earnings, the current year EPS is expected to finish 72.4% lower than 2019 but is expected to increase 64.8% next year. That’s a reflection of the lower margin shift to Disney’s business. While they’ll be feeding on lower margins in the near-term, how long will it take for its parks to be open and movies returning to theaters?
The Disney unions are now kicking it into gear by lobbying California Governor Gavin Newsome to reopen the parks. If the unions start to lobby and the mouse ears come together, maybe they can get it done.
Disney Charts
Disney gapped higher following day after its last report on August 4. The company beat analyst estimates significantly and the price responded with closing over $10 higher on the session.
The low of that day was $123.28, which is expected to be an area of support for the stock going forward. That price level was tested on two separate occasions on September 24 and October 6 before gapping higher on October 13. The lack of a stimulus deal has to hurt companies like DIS but it’s likely going to happen at some point this year.
Conclusion
Disney’s price expectations from this trade is not a foregone conclusion but it is intriguing. With limited risk and massive upside, it puts into perspective the amount of potential movement in Disney. The fact Disney has faired as well as they have is a testament to the diversification of their business model. That fact makes this company the media and entertainment monster than it is.
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