Investors of The Walt Disney Company (DIS) have kept the share prices range bound ahead of the company’s fiscal third quarter earnings announcement. At first glance, it appears that option traders are positioned for a positive move, as the number of call options is growing in the open interest. The unusual option activity could create a strong downward trend in the price action if Disney delivers a negative earnings surprise.

A sizable number of call options is growing in the open interest for Disney, and option premiums are at an unusually elevated level right now. Trading volumes indicate that traders have been buying calls and selling puts in anticipation of a favorable earnings report. Unwinding these bets could create unforeseen downward pressure on the share price of DIS.

It is difficult to accurately predict the direction a stock will move after earnings. However, a comparison between the stock’s price action and option activity shows that, if DIS delivers a negative report, the company’s share price could fall, moving further below its 20-day moving average after the announcement. This is possible because options are priced for a move upwards, but unexpected poor news could catch traders by surprise and create a swift decline in share price.

Traders and investors have kept the Disney share price range bound ahead of the earnings announcement.
The share price has recently closed below its 20-day moving average.
Call and put pricing is predicting a stronger move to the upside.
The volatility-based support and resistance levels allow for a stronger move upwards.
This setup creates an opportunity for traders to profit from an unexpected earnings result.

A comparison between the details of both option behavior and stock price can grant chart watchers valuable insight; however, it is imperative to understand the context in which this price action took place. The chart below depicts the price action for the DIS share price as of Wednesday, Aug. 11. This created the setup leading into the earnings report.

Over the past month, the trend for DIS stock has the share price rising to the top third of the volatility range, before yo-yoing above and below the 20-day moving average. In this time period, it’s notable that the lowest DIS share price was around $169 in early July, whereas the highest share price was roughly $186 in mid-July. The share price closed in the middle region depicted by the technical studies on this chart.

The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has risen toward but still closed below the 20-day moving average in the week before earnings. This price move from DIS shares implies that investors’ confidence is fading as the earnings report approaches.

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

In this context where the price trend for DIS has recently closed below its 20-day moving average, chart watchers can recognize that traders and investors are expressing ambivalence going into earnings. It’s notable that, in the week before earnings, Disney’s share price rose from well below the moving average and has closed just below it. That makes it important for chart watchers to determine whether the move is reflecting investors’ expectations for favorable earnings or not.

Option trading details can provide chart watchers with additional context to help them form an opinion about investor expectations. Recently, option traders are favoring calls over puts by a noticeable margin. On Tuesday, there were over 48,000 calls traded as opposed to over 29,000 puts. Normally, this volume indicates that traders are feeling bullish toward the upcoming announcement.

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn 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, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Option traders recognize that DIS shares are in an average range and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and Aug. 20, the Friday after the earnings report is released. The green-framed box represents the pricing that call option sellers are offering. It implies a 36% probability that DIS shares will close inside this range by the end of the week if prices go higher. The red box represents the pricing for put options with a 38% chance if prices go lower on the announcement.

It’s necessary to note that the open interest featured nearly 565,000 calls compared to almost 506,000 puts, demonstrating the bias that option buyers had, as traders favored calls over puts. It’s notable that call volume outweighed put volume on Tuesday over 1.5 -to-1, which could further skew open interest numbers in favor of call options. Even though there are a high number of puts in the open interest, implied volatility for these options has been dropping, which means that these options are being sold, rather than bought.

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months.

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run either way, but with slightly more room to the upside. This suggests that option buyers don’t have a strong conviction about how the company will report, even though recent call volumes outweigh put volume. Although investors and option traders do not expect it, a surprising report would push prices dramatically higher or lower.

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, DIS shares fell by 2.6% the day after earnings and continued to fall the following week. Investors may be expecting a different kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.

Disney may not have the largest market cap, but it certainly could be considered a bellwether stock. Even so, its results most likely won’t have a direct effect on index prices. No matter what the report says, it could have an impact on stocks in the entertainment industry. A positive report could lift other stocks in the industry such as Netflix, Inc. (NFLX), Comcast Corporation (CMCSA), or Roku, Inc. (ROKU). It could also affect exchange traded funds (ETFs) such as State Street’s S&P 500 ETF Trust (SPY) or the Vanguard Communication Services ETF (VOX).


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