This IS the Disney Trade You’re Looking For

by Joseph Hargett | November 8, 2012 9:25 am

Later tonight, in a galaxy not too far away, Walt Disney (NYSE:DIS[1]) will step into the limelight and report fiscal fourth-quarter earnings — and traders willing to jump on before the report might be able to pick up a few Imperial credits.

Disney recently made the jump to light speed in the financial media, announcing that it was acquiring Lucasfilm for $4 billion in cash and stock[2] from Star Wars creator George Lucas. What’s more, the company rejuvenated the Star Wars fanbase by announcing that Episode VII would debut in 2015[3] and that more films were slated to follow.

While this acquisition clearly will have no impact on tonight’s report, it certainly could factor into any forward-looking statement. But if analysts are worried about any potential impact from Disney shelling out $4 billion for Lucasfilm, they aren’t showing it.

Specifically, 17 of the 30 brokerage firms following DIS currently rate the shares a “buy” or better, compared to 13 “holds” and no “sell” ratings. Additionally, the most recent activity on the analyst front was an upgrade to “buy” at Argus on Nov. 4.

The world’s largest media conglomerate is expected post a net profit of $1.2 billion, or 68 cents per share — a roughly 11% increase over earnings in the same quarter last year — on revenues of $10.9 billion, or 5% better. However, according to EarningsWhisper.com, the whisper number for DIS earnings is 2 cents higher than the consensus.

Turing to the options pits, traders are zeroing in on the out-of-the-money November 52.50 call, where 14,350 contracts are currently open, and the November 55 call, which sports open interest of 9,978 contracts. On the put side, the November 50 strike is home to peak open interest of 8,800 contracts, followed by 6,921 puts at the November 52.50 strike.

Overall, November implieds appear to be pricing in a post-earning move of about 4% for DIS. In other words, options traders are betting on either a jump to $52.03 or a drop to $47.97 (from Wednesday’s closing price of $50.08) after Disney reports.

DISweekly 300x254 This IS the Disney Trade You're Looking For
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Technically speaking, DIS’ price action supports the bullish outlooks from options traders and analysts. The stock has rallied more than 32% so far in 2012, breaking out to a string of fresh all-time highs above $50 in September. Throughout this rally, DIS enjoyed the solid support of its 10-week and 20-week moving averages.

Following an orderly pullback in October alongside the broader market, DIS is trading above double-barreled support from the $50 level and its rising 20-week trendline. With DIS poised for a potential oversold bounce, and an earnings report that could provide fuel for the fire, traders might want to seriously consider a bullish position ahead of tonight’s report.

Since trading ahead of an event like earnings can be risky, traders looking to join the bullish crowd ahead of Disney’s report might want to limit their exposure by entering a bull call spread instead of just buying calls. With this strategy in mind, a November 50/52.50 bull call spread could potentially be quite profitable.

This spread was last offered at 88 cents, or $88 per pair of contracts, placing breakeven at $50.88 — a gain of roughly 1.6% from Tuesday’s close.

A maximum profit of $1.62, or $162 per pair of contracts, is possible if DIS closes at or above $52.50 when November options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

Endnotes:
  1. DIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=DIS
  2. acquiring Lucasfilm for $4 billion in cash and stock: http://investorplace.com/2012/10/disney-steals-lucasfilm-geeks-and-investors-rejoice/
  3. Episode VII would debut in 2015: http://investorplace.com/2012/10/lucas-sells-star-wars-franchise-to-disney/

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