Disney Earnings: Diagonal Call Spread vs. $120 Calls

Key Takeaway

• Disney's stock anticipates a 6% move post-earnings, exceeding historical averages, with analysts bullish, raising targets to $130.
• Options traders favor the $120 strike calls for Disney, signaling a 6.75% rally expectation despite a low 20% profitability chance.
• A diagonal call spread strategy is suggested over outright call purchases for higher profit probability ahead of Disney's earnings report.

Market Anticipates Disney Earnings

Disney's stock has seen significant activity ahead of its earnings report, with options traders showing a bullish stance. The market is implying a 6% move by the end of the week, which is higher than the average earnings-related move historically observed for Disney. This comes after the stock experienced an 11.5% surge following its first-quarter earnings release in February. Analysts are expecting a modest 1% revenue increase for the quarter, with Disney guiding for 5.5 to 6 million Disney+ subscriber gains. Despite the focus on streaming, Disney's "Experiences" segments, including theme parks, resorts, vacations, and merchandising, remain a larger contributor to revenues and profits, with Experiences revenues hitting $32.5 billion for the full year 2023, compared to $16.42 billion from subscriber fees.

Analysts' Views on Disney and Other Stocks

Deutsche Bank reiterated Disney as a buy, raising its price target to $130 from $125, driven by higher estimates. This bullish outlook is part of a broader trend of analyst calls on Monday, covering various sectors from technology to banking. Morgan Stanley initiated EHang Holdings with an overweight rating, citing its growth potential and government support. Baird upgraded Micron to outperform, adding it to their list of top semiconductor ideas, while Loop Capital Markets raised its price target for Amazon, maintaining a buy rating.

Options Trading and Investment Strategies

The most active options contract for Disney was the $120 strike calls, with buyers betting on at least a 6.75% rally by the end of the week. However, the options market suggests a low probability of profitability for this trade, estimated at around 20%. An alternative strategy for investors seeking a higher probability of profit could be a diagonal call spread, involving the purchase of June $115 calls and the sale of May 10th weekly $120 calls. This strategy requires a larger initial outlay but offers a greater chance of profit due to the less significant appreciation required by the stock.

Street Views

• Julie Biel, Money Manager (Neutral on Disney):

  "While a lot of attention is directed at streaming, Disney’s 'Experiences' segments, which includes its theme parks, resorts, vacations and merchandising, is a much larger contributor to revenues and profits than subscriber revenues."