Disney (DIS) Option Traders Mildly Bullish

The share price of The Walt Disney Company (DIS) has recently trended higher in the week before the company is slated to report earnings for the fiscal first quarter. Analysts expect Disney to announce $0.63 in earnings per share (EPS) and $20.96 billion in revenue. Following the precipitous drop in Netflix, Inc. (NFLX) after reporting poorer-than-expected subscriber growth, investors will be keen to pay attention to net additions of Disney Plus subscribers for the quarter.

A growing number of call options remain in the open interest for Disney, and option premiums are unusually high ahead of the company's earnings report. Trading volumes indicate that traders have been buying call options and selling puts in favor of a positive earnings report. If speculative option bets were to unwind, it could create downward pressure on the share price of Disney.

As sector rotation continues in an effort to predict the next step of the economic cycle, the communications sector has lagged the market at large, yet Disney has outperformed. Since the start of 2022, State Street's Communications Sector ETF (XLC) has fallen by 10.8%, while State Street's S&P 500 Index ETF (SPY) has shed 6.4%. In that same time frame, Disney stock has fallen by 10%.

Price Action

An analysis of recent option activity combined with technical analysis of share price movement can grant chart watchers valuable insight into the overall sentiment toward Disney ahead of earnings. The chart below illustrates the recent price action for the Disney share price as of Monday, Feb. 7.

This chart highlights how the Disney share price trended in an extreme low range to the downside following the prior earnings report. Disney trended higher above the 20-day moving average in December 2021 and until mid-January 2021. After gapping down 7% on a single day in late January, Disney stock has trended slightly higher in the weeks ahead of earnings.

The purple bands on this chart are an extreme historical volatility range formed by 4 standard deviations of 20-day Keltner Channel indicators which depict price levels that represent a multiple of the average true range (ATR) for Disney stock. ATR is a standard tool for illustrating historical volatility over time. These bands could be considered to represent the extreme ranges of option pricing.

It's notable that these bands briefly narrowed in mid-December to early January and have since widened. This could mean that option pricing is growing ahead of the Disney earnings announcement.

An analysis of recent option activity combined with technical analysis of share price movement can help chart watchers gain valuable insight into the overall sentiment toward Disney stock. The chart below depicts the recent price action for the Disney share price as of Monday, Feb. 7.

Communications Sector Breakdown

The communications sector is made up of companies that make communication possible on a global scale, whether it is through the phone or internet, through airwaves or cables, through wires or wirelessly. The largest companies in the sector are telephone operators, satellite companies, cable companies, and internet service providers.

With close ties to the technology sector, the communications sector could be considered a riskier investment during times of inflation, simply for the fact that investors could seek safe havens for their money. The chart below compares the recent performance of Disney with the top holdings of State Street's Communications Sector ETF (XLC).

This chart has removed two of the top holdings of XLC—Activision Blizzard, Inc. (ATVI) and Meta Platforms, Inc. (FB)—due to the recent outsized moves the two stocks have made: Activision due to an acquisition and Meta due to poor earnings. What's notable about this chart is that Disney has been the worst performing stock of XLC. Stocks in this sector have experienced mixed share price activity after reporting earnings.

Volume Profile and Option Outlook

Comparing price action and option trading can provide chart watchers insight into the sentiment traders and investors hold toward a company's future performance. However, further context of price action in terms of volume could illustrate areas of support and resistance, which could provide additional context to option open interest. The chart below illustrates the recent price action of Disney, in addition to a price-based volume pattern on the left side.

This price-based volume pattern depicts the prices where investors have bought and sold the shares previously. A noticeable amount of buying in the past often implies that investors will feel the desire to defend their positions at those same prices by buying more shares or at least not selling any further. When volumes at a given price are low or nonexistent, it implies that few, if any, investors have the need to defend their positions at these levels.

This chart illustrates how the Disney share price has recently closed well below any notable thin zones of buying or selling based on volume. There does appear to be a thin zone of buying around the $165 level. This level would provide significant resistance if the Disney share price were to rise to this level.

Option trading can provide chart watchers additional context to help them form an opinion about expectations that investors may have. Recently, option traders are favoring calls over puts by a significant margin. On Monday, Feb. 7, there were over 105,000 calls traded compared to 53,000 puts. Normally, this volume indicates that traders are feeling bullish toward the upcoming earnings result, although further analysis is required.

The open interest for Disney currently features 814,000 calls compared to 752,000 puts. At first look, it would appear the open interest is slightly bullish. However, further understanding of how this open interest is shaped can provide even further context.

For Feb. 18, the next monthly option expiration date, the highest open interest is on the $150 call with 23,000. This represents 5% upside to the current share price. The Feb. 18 expiration features 123,000 calls compared to 97,000 puts in the open interest, which skews bullishly. 

However, it should be noted that implied volatility and open interest is also rising for the Feb. 18 $150 put ahead of earnings, which has an open interest of 22,000. An analysis of prior option trading volumes indicates that there could be a significant number of straddles at the $150 strike. This position involves simultaneously buying a call and a put and profiting when the stock moves further in either direction than what a trader has paid for the position.

Based on current option pricing, a $150 straddle would cost $13.34 total for both legs of the contract and would be profitable with a nearly 9% earnings-based move on Disney stock. It's possible that traders are short these straddles, in which case the position is profitable if Disney stock remains in a range after reporting earnings.

Wrapping Up

The Disney share price has been slightly trending upwards in the week ahead of the earnings report. The Disney share price has recently closed just below the 20-day moving average. Option traders appear to be buying calls and selling puts ahead of earnings, implying a bullish sentiment. If these bets were to unwind, it could place unexpected downward pressure on the Disney share price.