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HAL9000
Nov 10, 2016 10:59 AM

0-Cost Options Strategy ahead of earnings 

Walt Disney Company (The)NYSE

Description

SOUND BUT UNEXCITING FUNDAMENTALS
Consensus is favorable on aggregate: Buy recommendation, +12.75% target upside.
Numbers are compelling (5-yr rev growth +6.63% and ROE +20.35%) but growth has been slipping, esp. in TV.
Valuation is un-demanding at a P/E of 17x (now less expensive than the market?)

TECHNICALLY ON A DOWNTREND BUT COULD BE REBOUNDING
DIS has been on a downtrend since the double-top of Aug/Nov 2015.
The long-term (M chart) is still clearly negative.
The medium-term (W) shows a series of negative cross-overs and a H&S formation.
But lately the stock has been rebounding with the market and the short-term picture (D) is turning positive.
A close above the 97.00 (MA200) would confirm the positive turnaround.
A close below 90.00 would confirm the negative trend and potentially take us towards the H&S target of 84.00.

EARNINGS AND GUIDANCE WILL BE A KEY CATALYST
What could propel the stock higher are the earnings and guidance from DIS.

STRATEGY: 0-COST EXPOSURE TO UPSIDE IN CASE OF BREAKOUT
Buy Nov 18 2016 $98 call to play the breakout = 0.34/share
Sell Nov 18 2016 $90 put to finance the synthetic long = 0.33/share
Best-case scenario: Stock breaks out ==> Make $ on the call or convert
Worst-case scenario: Stock tanks ==> Go long a quality long term holding close to the 52w low.

Comment

So the numbers are out and DIS disappoints again on the back of weak ESPN numbers. Expect the stock to trade slightly lower and to remain within our in-the-money band ($90-$98), in which case the best thing to do will be to do nothing. Let's see how this looks at the open.

Trade closed: target reached

Call option in the money. Unwind both legs of the options here and make an indicative 0.83/share.
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