A Potential Earnings Play in Disney (DIS)

Disney-earnings-trade-iron condor

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Disney (DIS) is due to announce after the close next Wednesday.

So, as always, let’s go through the exercise of looking at a potential trade and its associated mechanics to see if DIS is offering a decent trading opportunity this time around.

Here is an early look at a potential earnings trade for next week. Hopefully this helps a few of you, particularly those who are new to earnings trades, with the mechanics of a trade.

Iron Condor Earnings Trade in Disney (DIS)

Click here for a step-by-step approach to iron condors.

Again, Disney (DIS) is due to announce before the open next Wednesday. So, let’s use a risk-defined options strategy like an iron condor.

The stock is currently trading for 113.15.

disney-stock-chart-may-6

The next item is to look at DIS’ expected move for the expiration cycle that I’m interested in.

The expected move or expected range over the next 15 days can be seen in the pale, orange-colored bar below. The expected move is from 104 to roughly 122, for a range of $18.

expected-move-disney-dis

Knowing the expected range, I want to, in most cases, place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 104 to 122.

This is my preference most of the time when using iron condors.

If we look at the call side of DIS for the May 20, 2022, expiration, we can see that the 127 call strike offers an 88.87% probability of success. I’m going to sell the short call at the 127 call strike and define my risk with the 132 call strike. By choosing the 132 call strike to define my risk, I know that there is less than a 6% chance that I will take a max loss on the trade.

Disney-dis-bear-calls-iron-condor

Now let us move to the put side. Same process as the call side. But now we want to find a suitable strike below the low side of our expected move, or 104. The 100 put strike, with an 83.36% probability of success, works as our short put strike. I’m going to define my risk by choosing the 95 put strike with a 90.48% probability of success. This means we have less than a 10% chance of taking a max loss on the downside.

disney-dis-bull-put-iron-condor

We can create a trade with a nice probability of success if DIS stays between our 27-point range, or between the 127 call strike and the 100 put strike. Our probability of success on the trade is 88.87% on the upside and 83.36% on the downside.

I like those odds.

Here is the trade:

Simultaneously:

Sell to open DIS May 20, 2022, 127 calls

Buy to open DIS May 20, 2022, 132 calls

Sell to open DIS May 20, 2022, 100 puts

Buy to open DIS May 20, 2022, 95 puts for roughly $0.85 or $85 per iron condor

DIS-disney-price-iron-condor

Our potential return on the trade: 20.5%

Our margin requirement is $415 per iron condor.

Again, the goal of selling the DIS iron condor is to have the underlying stock stay below the 127 call strike and above the 100 put strike immediately after DIS earnings are announced.

Here are the parameters for this trade:

  • The Probability of Success – 88.87% (call side) and 83.36% (put side)
  • The maximum return on the trade is the credit of $0.85, or $85 per iron condor
  • Breakeven level: 99.15 – 127.85
  • The maximum loss on the trade is $415 per iron condor. Remember, we always adjust if necessary, and always stick to our stop-loss guidelines. Position size, as always, is key.

One other important note: I prefer to make these trades the day before earnings are announced, so I would expect to see the premium a bit lower than it is now due to decay. So premium could be an issue at the time of the trade. But I like to see where potential trades stand the week to a few days prior, so I have a good understanding of what stocks look appealing for a potential trade around earnings, which is why I go through this exercise with the stocks on my weekly earnings watch list.

5 comments on “A Potential Earnings Play in Disney (DIS)

  1. MichaelD on

    Curious why you chose the 20 May expiry instead of the 13 May expiry? DIS reports on 11 May 2022. I’m sure you have more time premium but the collapse of premium after earnings with the 13 May expiry should be greater.

    Reply
    • Andy Crowder on

      Michael,

      When a company reports later in the week I tend to go out one additional week. Yes, the collapse is greater the week of, but I’m not trying to make every last penny if I can alter the risk a bit and still make a decent return. Remember, it’s all about the law of large numbers hen trading earnings. While you can certainly make more going with the near-term expiration cycle, you also stand to lose significantly more as well. I hope this helps.

      Reply
  2. Frank Kudia on

    I noticed you put on this trade in the monthly expiration. If the vol in the monthly expiration is less than the vol in the weekly expiration next week, you may be able to collect more premium in the weekly expiration and have the ability to keep more of the premium from the vol crush than you might keep in premium from the the monthly expiration. Do you agree one should look at both before deciding in which expiration cycle one should place the trade?

    Reply
    • Andy Crowder on

      Frank,

      When a company reports later in the week I tend to go out one additional week. Yes, the collapse is greater the week of, but I’m not trying to make every last penny if I can alter the risk a bit and still make a decent return. Remember, it’s all about the law of large numbers hen trading earnings. While you can certainly make more going with the near-term expiration cycle, you also stand to lose significantly more as well. I hope this helps.

      Reply

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