Warner Brother Discovery’s (WBD) average 30-day options volume is 37,667. On Thursday, it was five times higher.
Investors were excited about the company’s news it would separate its linear cable networks from its streaming and studio businesses. The move suggests a spinoff of its cable networks could happen in 2025. Comcast announced in November that it would spin off its cable networks, including CNBC, MSNBC and the Golf Channel.
I have never been a fan of CEO David Zaslav. He's been involved in some of American business's most value-destructing M&A moves. It doesn't help that he's generated over a billion dollars in compensation without much shareholder reward.
Overrated? You bet.
But when there's a bet to be made based on a stock’s unusual options activity, I have to consider it.
In yesterday's trading, WBD had 13 unusually active calls and put options that expire in seven days or longer and had Vol/OI ratios of 1.24 or greater. Three calls had double-digit Vol/OI ratios, including the April 17/2025, $13 call at 53.85, the fourth-highest on the day.
It’s a decent bet, for sure.
What caught my attention were two calls and puts expiring on March 21.
I’m a babe in the woods when it comes to options. However, even for this novice eye, a possible strangle strategy stands out among the four.
The question is whether it’s a short or long strangle.
Have an excellent weekend!
The Difference Between Short and Long Strangles
A short strangle is when you sell a call option and a put option at a lower strike price with the same expiration date. A long strangle is when you buy a call option and a put option at a lower strike price and the same expiration date.
The long strangle bets that the stock will make a big move in either direction. While WBD stock is up 73% in the past six months, it could all blow up in a hurry with one bad earnings report. The profit potential is unlimited, while the loss is capped at the cost of the call and put.
The short strangle bets that the stock will trade within a tight range on reduced volatility. Up significantly in recent months, with no more news likely about the separation into two operating units, it’s possible that the stock will be dead money in the early months of 2025. The profit potential is limited to the premium received for the call and put, while the loss is unlimited if the stock moves in either direction.
There are three possible strangles: the $15 call and $13 put, the $15 call and $9 put, and the $13 call and $9 put.
You’ve got to decide between Short or Long, and which of the three makes the most sense.
Remember, It’s All About the Risk/Reward Proposition
Unless you're independently wealthy, you likely have a risk tolerance that will only go so far. Entertainment stocks continue to possess above-average risk based on an industry that continues to evolve. Meanwhile, Warner Bros. Discovery has several different players in its corner. John Malone comes to mind. Other businesses stand in the way of ultimate success: David Ellison and the merged Skydance-Paramount Global (PARA) entity.
Even though I’m not a fan of Zaslav as CEO, the long strangle provides the lower-risk bet, so let’s take that.
The $15 call and $13 put would cost $1.97, the $15 call and $9 put would cost $0.69, and the $13 call and $9 put would cost $1.29.
So, the worst-case scenario is that you’re out $197 per contract. That’s reasonable.
The $15 call and $13 put has a breakeven on the upside of $16.97 [$15+$1.97] and a breakeven on the downside of $11.03 [$13-$1.97].
The $15 call and $9 put has a breakeven on the upside of $15.69 [$15+$0.69] and a breakeven on the downside of $8.31 [$9-$0.69].
The $13 call and $9 put has a breakeven on the upside of $14.29 [$13+$1.29] and a breakeven on the downside of $7.71 [$9-$1.29].
Based on yesterday’s closing price of $12.49, the $15 call/$13 put has to rise by 35.9% and fall by 11.7%. The $15 call and $9 put has to rise by 25.6% and fall by 33.5%. Lastly, the $13 call/$9 put has to rise by 14.4% and fall by 38.3%.
The Bet to Make
My first instinct is to go for the cheapest bet--the $15 call and $9 put. Given the Barchart Technical Opinion is Strong Buy, WBD’s got a shot to appreciate by 35.9% over the next three months. After all, it’s gained 27% in the past month alone.
Looking at today’s trading and Barchart’s Straddles & Strangles page, the March 21/2025 $13 call and $7 put have the best profit probability at 31.4%. The maximum loss is just $1.09. However, as I write this about 90 minutes into Friday trading, the outlay is 8.72% of its $12.50 share price.
Based on yesterday’s closing price of $12.49, almost identical to today's share price, the breakeven on the $13 call to the upside is 20 cents less than yesterday. On the downside, it’s $1.80 more because the put strike is $2 lower. The $9 put breakeven would be 20 cents higher at $6.11.
Even though cheap is nice, I like the $15 call/$13 put combination because the downside breakeven was just 11.7%, with a maximum loss of only $1.97 or 15.8% of the share price.
