Unusual Options Activity for Disney (DIS) Aligns With a Fundamental Pivot

After a meteoric recovery from the malaise of the COVID-19 lows, shareholders of entertainment stalwart Disney (DIS) looked forward to a complete normalization of society. However, said normalization also managed to hurt DIS stock as the revenge travel phenomenon took hold, translating to consumers eschewing at-home entertainment platforms. Fortunately, though, broader circumstances suggest that a fortuitous pivot will get people back to the Magic Kingdom.

Several days ago, Disney’s rival in the streaming sector Netflix (NFLX) delivered a much-needed earnings beat for its third quarter. Primarily, the company grew revenue 6% on a year-over-year basis to $7.93 billion. Notably, Wall Street’s consensus sales target was $7.85 billion. According to the Motley Fool, revenue growth was “driven by a 5% increase in average paid subscriptions and a 1% rise (8% in constant currency) in average revenue per subscriber.”

Also, Netflix managed to deliver paid net subscriber growth of 2.41 million. Per Motley Fool, that was “down from 4.4 million in the year-ago period but much better than the 1 million the company had forecast and analysts were expecting. Netflix ended the quarter with 223.09 million global paid subscribers, up about 5% year over year.”

Finally, Netflix posted net income of $1.4 billion or $3.10 per share, representing a 3% YOY loss. However, this tally easily surpassed the consensus estimate targeting $2.13 per share.

Obviously, the positive print offers the most benefits for Netflix. However, Disney should receive some downwind joy as the fundamentals that helped spark Netflix’s Q3 beat should apply to DIS stock as well. Specifically, we may be witnessing the broader entertainment ecosystem return to the living room.

With millions of consumers having exercise their revenge travel urges, the current emphasis may be on cheap entertainment. In terms of bang for the buck, few platforms can compete with compelling streaming services. And bullish traders appeared to have caught on.

Investors Eagerly Focus on DIS Stock

Upon the ringing of the closing bell for the Oct. 26 session, DIS stock represented one of the highlights of the day’s unusual options activity. In fact, it was the highlight, ranking as the most unusual for the Wednesday session.

Specifically, bullish traders bid up the $130 calls with an expiration date of Nov. 11, 2022. Keep in mind that Disney will release its fiscal full year and Q4 2022 earnings results on Nov. 8. Volume reached 18,599 contracts against an open interest reading of 172. Moreover, the bid-ask spread as represented by the midpoint price (11 cents) came out to 9.09%, which stands on the high side of the spectrum.

For the record, DIS stock closed at $104.63 on Wednesday. Therefore, shares will need to rise 24.25% for the aforementioned call to be at the money.

Frankly, it’s an aggressive trade. Disney features a beta of 1.23 so significant movements relative to the benchmark index are not entirely commonplace. Still, to be fair, DIS gained over 9% in the trailing month. Tack on an earnings beat and yes, it’s possible that Disney could be in the money relative to the above call option.

According to data from Barchart.com, Disney’s put/call open interest ratio stands at 0.62. Typically, the delineation point between bullish and bearish sentiment is 0.70, with figures lower than this level indicating that more traders are acquiring calls than puts. Therefore, the recent optimistic spike in DIS stock reflects the predominant trend in the options market.

Strange Tailwinds Bolster Disney

More than likely, traders bidding up the $130 calls on DIS stock are betting specifically on the underlying company beating expectations for its earnings report. To be sure, anything can happen with such endeavors so participation in this trade represents a personal choice. However, as a fundamental narrative, Disney certainly has a chance to engineer a substantive comeback.

First, the company may benefit from broader economic pressures – a counterintuitive argument. However, with inflation and the subsequent erosion of purchasing power dominating proceedings for the first half of this year, consumers have every incentive to trade down their entertainment budget to lower-cost alternatives. Again, streaming services provide much bang for the buck, thus boosting the Magic Kingdom’s platform Disney+.

Second, broader fears of a global recession may also symbolize another strange tailwind for DIS stock. Back during the Great Recession, box office attendance boomed as demand for escapism accelerated. Should another economic downturn materialize, it would of course be bad news for most industries. However, Disney stands a decent chance of mitigating this pain through offering cheap escapism.

Combine this storyline with Disney’s ownership of popular entertainment franchises such as Star Wars and you have an enticing bullish argument for DIS stock. Thus, it’s one of the names to keep on your radar as we navigate these trying circumstances.

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