Shares of Disney (NYSE:DIS) have certainly been on fire lately. Disney stock has rallied 20% over the past two weeks on the heels of Avengers:Endgame and other content related news. Certainly the latest Avengers movie is an undeniable hit, taking in over $1 billion worldwide. The reaction in Disney stock, however, has been even a bigger hit. DIS is now overvalued, overbought and overloved. Time to take a short-term short in Disney.
Disney stock is now trading at rich valuations on almost every metric. Price/Book and Price/Cash flow are well above the 5 year average. Price to sales is now at a ten year high at 3.5.
J.P. Morgan bumped their price target for DIS stock from $137 to $150 yesterday, citing continued outperformance. The new price target was $150, leaving scant upside to the $139.30 closing price for Disney stock. They also expect $6.50 in earnings for FY 2020 which implies a 23 forward P/E to their $150 price target-a massive premium to the 5 year average P/E of only 19.2. Disney stock certainly no ot a bargain at current levels.
DIS is also way overbought on a technical basis. 9 day RSI and MACD both reached extremes at the highest reading of the year. Disney stock is trading at a huge premium to the 20 day moving average as well.
Most importantly, DIS stock had a key reversal day yesterday. Shares traded up to new all-time highs at $142.37 before reversing to close lower and near the lows of the day. This type of price action is may times emblematic of a top as the buyers have finally become exhausted. It is even more powerful given the magnitude of the rally.
Earnings are due May 8 for Disney. Expectations are for $1.60 in EPS and $14.58 billion in revenue. Given that the stock has rallied so sharply in front of earnings, I think probability favors a drop over a pop following the release.
So to position for a pullback, a short-term put diagonal spread makes intuitive sense.
Disney Stock Trade Idea
Buy DIS May 17 $138 puts and sell DIS May 10 $135 puts for a $1.50 net debit.
Maximum risk on the trade is $150 per spread. Maximum gain is achieved if DIS closes near $135 on May 10 expiration.
Tim Biggam may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his strategies can go to https://marketfy.com/item/options-and-volatility.
