Disney (DIS) is due to report earnings on May 5th after the closing bell. The Barchart Technical Opinion rating is a 56% Sell with a Strengthening short term outlook on maintaining the current direction.
Long term indicators fully support a continuation of the trend.
DIS rates as a Strong Buy according to 17 analysts with 2 Moderate Buys and 3 Hold ratings. Implied volatility is 37.35% which gives DIS an IV Percentile of 68% and an IV Rank of 33.37%
Today, we will analyze three different ideas:
- A Short Iron Condor
- A Bull Put Spread
- A Butterfly Spread
Short Iron Condor
The first strategy is a short iron condor. An iron condor aims to profit from a drop in implied volatility, with the stock staying within an expected range.
When implied volatility is high, the wider the expected range becomes. Disney’s IV Percentile is showing 68%, which means the current level of volatility is higher than 68% of the occurrences in that last twelve months.
The maximum profit for an iron condor is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
Using the May 12 expiration, traders could sell the 90-strike put and buy the 85-strike put. Then on the calls, sell the 106 call and buy the 111 call.
Yesterday, that condor was trading around $0.95 which means the trader would receive $95 into their account. The maximum risk is $405 for a total profit potential of 23.46%.
The profit zone ranges between 89.05 and 106.95. This can be calculated by taking the short strikes and adding or subtracting the premium received.
Let’s take a look at another potential option strategy.
Bull Put Spread
Traders thinking that DIS might have a positive response to earnings could just trade the bull put spread side of the iron condor.
Trading just the bull put spread side would involve selling the May 12th 90 put and buying the 85 put. This spread could be sold yesterday for around $0.55 or $550 in total premium.
The maximum gain is $55 with total risk of $445 for a potential return of 12.36% with a breakeven price of 89.45.
The final idea we will look at is a butterfly spread.
Butterfly Spread
A butterfly spread is constructed by buying an in-the-money call, selling two at-the-money calls and buying an out-of-the-money call. The trade is entered for a net debit meaning the trader pays to enter the trade. This debit is also the maximum possible loss.
The maximum profit is calculated as the difference between the short and long calls less the premium that you paid for the spread.
Using the May 12 expiry, traders could buy the 90-strike call, sell two of the 97-strike calls and buy one of the 104-strike calls.
The cost for the trade would be $225 which is the most the trade could lose.
The maximum potential gain is $475 which would occur if DIS finished right at 97 at expiration.
Company Details
Walt Disney Company has assets that span movies, television, publishing and theme parks. In October 2020, Disney reorganized its media and entertainment operations, which had been previously reported in three segments: Media Networks, Studio Entertainment and Direct-to-Consumer & International.
From the first quarter of fiscal 2021, Disney began reporting the financial results of the media and entertainment businesses as one segment, Disney Media and Entertainment Distribution (DMED) across three significant lines of businesses: Linear Networks, Direct to- Consumer and Content Sales/Licensing.
Conclusion And Risk Management
There you have three different trade ideas for Disney’s earnings. All three are risk defined trades, so you always know the worst-case scenario even if DIS makes a bigger than expected move.
Short-term trades over earnings such as these ones are almost impossible to adjust. Either the trade works, or it doesn’t so position sizing is vital.
Short-term trades also have assignment risk, so traders need to be aware of that possibility.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
