Have you felt it? There’s been an awakening in Disney (DIS).
No, it’s not the force. It’s those evil bears coming out of hibernation. Star Wars: The Force Awakens hype has kept Disney stock aloft in recent months but now that the long-awaited movie has been released a selling stampede has descended on DIS.
Friday’s 3.8% shellacking was the largest down day seen in DIS stock since the August debacle. The candlestick ended just shy of a Marubozu formation, which develops when a stock opens at the high of the day, sells off all day long, and closes at the exact low of the day. It’s mega bearish — evil you might say — which is appropriate given its resemblance to Kylo Ren’s lightsaber (sans the twin horizontal pieces).
Last week’s reaction was the ultimate manifestation of the “buy the rumor, sell the news” phenomenon. Anticipation over the new Star Wars movie lifted Disney stock recently as giddy investors snatched up shares of the new Star Wars steward in hopes of a blockbuster opening. But with the debut now behind us, investors sold the news with abandon on Friday.
The relentless selling waves that gripped DIS stock Friday were accompanied by massive volume. Were it not for the drastic distribution seen in August, Friday’s high volume swoon would have been the worst seen in years.
Perhaps you’re wondering if the selling sortie was just that — a short-term bear raid destined to become a one-off event — or whether it’s the beginning of prolonged domination by sellers.
Like the score of new questions raised during the ultra-entertaining new Star Wars flick, the answer to this query remains a mystery — though I’d be willing to bet the DIS price dip gets bought sooner than later.
The Disney Star Wars Trade
What option traders should find of particular interest is the sharp rise in implied volatility seen over the past week. Jittery investors have flocked to the options market in search of protection, thereby driving up option premiums. The IV rank for Disney options now sits at 66%, a level not seen since August.
If you think the bulk of the damage is now priced into Disney stock price and it’s destined to chop around for a spell, selling iron condors is a compelling trade here.
The trade consists of selling an out-of-the-money bear call spread and an out-of-the-money bull put spread with the anticipation that Disney stock will remain between both spreads. Sell the Jan $100/$95 put spread for 41 cents credit and the Jan $115/$120 call spread for 64 cents credit. The total net credit of $1.05 represents the max reward and will be captured if the Disney stock price sits between $100 and $115 at expiration.
The max risk is limited to the distance between strikes minus the net credit, or $3.95, and will be lost if DIS falls below $95 or rises above $120 by expiration. I’ve highlighted the upper and lower breakeven points in the chart above to illustrate the range Disney stock needs to trade in to deliver a profit.
At the time of this writing Tyler Craig owned bull put spreads on DIS.
