There’s no way around it. The force has not been with Walt Disney Co (NYSE:DIS) this year. Disney stock is down around 7% in 2018, with investors worrying more about the company’s broadcasting division and look past a string of box-office smash hits.
What’s more, Disney stock is approaching key technical support, even as the shares ping-pong around the psychologically important $100 level. Next week’s trip to the earnings confessional will be an important one.
Click to Enlarge For the record, Wall Street is expecting a profit of $1.69 per share from Disney. Revenue is expected to rise 5.6% to $14.08 billion. Actual expectations may be a bit higher, however. Earnings Whispers puts the whisper number at $1.74 per share. Historically, Disney has beat expectations in three of the past four reporting periods.
I don’t see investors worrying too much about last quarter’s numbers. Disney is sitting on solid footing with it’s Marvel and Star Wars franchises, both pumping out solid results. In fact, guidance could be solid as well, with Marvel’s “Avengers: Infinity War” set to top $1 billion in global sales this weekend and “Solo: A Star Wars Story” looking at an opening weekend of $160-$170 million already.
The problem remains, as it always does in recent years, with ESPN. Disney’s former cash cow has hemorrhaged subscribers for the past year, and online ESPN streaming revenue isn’t making up the difference fast enough. If Disney can offer up any positive news on its broadcast and ESPN units, DIS stock will soar.
But that’s a big “what if.”
On the sentiment front, analysts and investors are divided on Disney stock. According to Thomson/First Call, half of the 30 analysts following Disney stock rate the shares a “hold” or worse. The 12-month consensus price target rests at $119.90. Price target increases are unlikely at this point, but upgrades could be in the making if Disney has some positive news on ESPN.
In the options pits, DIS options traders have pushed the stock’s May put/call open interest ratio up to 0.77. Put activity has been on the rise lately as traders bet on a continued breakdown in Disney stock. That said, this reading is above those taken ahead of the last two Disney earnings reports, hinting that sentiment may be shifting more bullish.
Overall, May DIS options implied volatility is pricing in a potential post earnings move of about 4.3% for Disney stock. This places the upper bound near $103, while the lower bound lies near $94.50.
2 Trades for Disney Stock
Call Spread: With the only real drag on Disney stock being ESPN, any positive news on this front could be a boon for DIS options traders. Furthermore, the shares are nearing key technical support levels, and buyers could finally emerge in the wake of a strong quarterly report.
Traders looking to bet on a Disney stock rally might consider a May $100/$102 call spread. At last check, this spread was offered at 63 cents, or $63 per pair of contracts. Breakeven lies at $100.63, while a maximum profit of $1.37, or $137 per pair of contracts — a potential 117% return — is possible if Disney stock closes at or above $102 when May options expire.
Put Sell: If you are looking for a more neutral-to-bullish strategy on DIS options, then a May $94 put is a good starting place. At last check, this put was bid at 65 cents, or $65 per contract.
As long as Disney stock trades above $94 through expiration, traders pursuing this strategy will keep the $65 premium. However, if DIS trades below $94 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $94 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.