Disney (DIS) Option Traders Strongly Optimistic

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Disney (DIS) Option Traders Strongly Optimistic

Optimistic speculators have pushed up The Walt Disney Company (DIS) share prices ahead of its quarterly results presentation. There is no way to foresee the direction of a stock following an earnings report. However, a comparison of the price movement of stock prices and option prices suggests that if Disney shares fall, causing a reversion to its 20-day moving average in the first few days after the announcement, downside-focused traders will be in the greatest position to benefit.

Key Takeaways

  • Traders and investors have driven the price of Disney shares higher heading into the announcement.
  • Disney stock price has been closing well above its 20-day moving average.
  • Put options are priced for a smaller drop and call options for a larger gain.
  • The volatility-based support and resistance levels are positioned better for a move lower.
  • This arrangement gives traders a better chance of profiting if the price decreases.

Investors who wish to safeguard their holdings or speculators who seek to benefit from accurately projecting unexpected swings in an underlying stock or index engage in option trading. That is, option trading is a wager on market probabilities. Chart watchers may acquire significant information by analyzing the intricacies of both stock and option price behavior, albeit it helps to understand the context in which this price behavior occurred. The chart below displays Disney’s share price activity and the setup building up to the earnings announcement.

Current Trend

The stock’s one-month trend finds the shares heading sharply upward. It is worth noting that Disney prices were $175 per share in mid-January and retraced somewhat to $163 per share before surging higher and ending at a high of $188.37 as the announcement day approaches. The price closed at the top extreme zone of the chart’s technical analysis. The studies are built on 20-day Keltner Channelindicators. These are price levels that are multiples of the stock’s average true range (ATR). This array serves to show the price’s movement from the top extreme to the lower extreme and back to the higher extreme. This remarkable price movement for Disney shares suggests that investors are still quite excited about the upcoming report.

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Tip

The Average True Range (ATR) has become a widely used technique for illustrating historical volatility over time. The average number of time periods employed in its computation is 10 to 20, which encompasses one to two weeks of trade on a daily chart.

In this setting, where the price trend for Disney has been increasing, chart watchers can see that traders and investors are bullish on earnings. As a result, chart watchers must decide if the move foreshadows investors’ expectations for a successful earnings report. The contrast of the volatility range indicated on the chart by the purple lines and the purple box in the backdrop provides evidence that investors are anticipating positive news from the corporate report. Prices have risen so rapidly that they are approaching the upper limit of this range.

Tip

The Keltner Channel indicator shows a series of semi-parallel lines based on a 20-day simple moving average, as well as an upper and lower line. This channel indicator is an effective visualization tool for charting historical volatility since the upper lines are produced by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price.

Trading Activity

Option traders have priced their options as a wager that the stock would close inside one of the two boxes illustrated in the chart between now and Feb. 12, the Friday after the earnings report is revealed. The price offered by call option sellers is shown by the green-framed box. If prices rise, there is a 75% likelihood that Disney shares will finish inside this range at the end of the week. The red box reflects put option pricing with the same likelihood if prices fall after the announcement. One thing to notice is that both the red and green boxes represent a price range that is greater than the move made by Disney shares in the week after the last earnings release. This means that option purchasers on both sides anticipate a significant change as a result of this statement.

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It is worth noting that over 139,300 call options were exchanged on Tuesday, compared to about 40,000 put options, illustrating the bias that option purchasers had. This three-to-one call-to-put ratio indicates that option traders are anticipating significant good news and are betting on a move upward, as illustrated in the chart below.

A 10-day Keltner Channel analysis set at four times the ATR yielded the purple lines on the chart. This metric tends to provide closely connected price action zones of strong support and resistance. These areas appear when the channel lines have made a noteworthy turn during the last three months. The levels that the turns represent are shown in the chart below. What stands out in this figure is that the call option price is substantially closer to the study’s top border than the put option pricing is to the lower boundary. This means that when the price approaches this line, buyers may encounter eager sellers, perhaps causing the price movement to reverse.

These support and resistance levels indicate much less support for prices if they begin to fall, and significantly more resistance for prices if they begin to increase. As a consequence of this, and because of the clear bias that option purchasers have toward positive news, poor news may take investors off guard and result in an unexpectedly big move. Disney shares surged 6% in the days after the prior earnings report. Because of the wide volatility range, there is a good chance that the price move after the next earnings report will be bigger than the prior time.

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Market Impact

The earnings announcement from Disney may have a little influence on the broader market indices. The price movement of Disney shares is favorably connected with the Dow Jones Industrial Average ETF from State Street (DIA).Because the company’s business segments are so intertwined with all parts of the economy, the results of Disney’s quarterly report may have ramifications for analysts looking for specifics to estimate economic direction.

Regardless of what the study says, it might have a huge effect on consumer discretionary companies. With more than half of the S&P 500 having reported profits by now and the vast majority of the components exceeding projections, investors may be in for a pleasant surprise. Consumer discretionary equities and exchange traded funds (ETFs) such as the Consumer Discretionary Select Sector SPDR Fund (XLY) or the SPDR S&P 500 ETF Trust might benefit from this (SPY).

The Bottom Line

Option traders placing bets on Disney favored call options by alargemargin over put options before the company’s earnings announcement. Because option buyers more often prefer buying calls than puts (usually by only a two-to-one margin), the current numbers for Disney options imply that investors are expecting good news from the company.

However, if a bad-news report is published, Disney shares could fall substantially. The lack of support in the volatility range could extend an unexpected drop well below the put option pricing range. Right now, the put options for Disney are not reflecting the possibility of a large drop in price, so in the off chance that share prices drop, option traders may have a surprisingly profitable outcome.

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