As I gazed at Wednesday's unusual options activity this morning in preparation for writing this article, the first thing that jumped out was Walt Disney’s (DIS) put options.
The House that Walt built had four put options yesterday exhibiting unusual options activity, including one with volume of 12,831, 18.30x the open interest, giving it the seventh highest Vol/OI ratio on the day. The three others had Vol/OI ratios higher than 3.0x.
At first, I hesitated to write about Disney after reading all the reports about second-time CEO Bob Iger being “overwhelmed and exhausted” by righting the ship. However, some of the best long-term investments start as duds, but slowly turn to gold as the business gets straightened out.
Why else would Nelson Peltz take a second run at Disney if he didn’t see an upside to his investor activism?
With more than $2.5 billion invested in Disney stock, making him one of the company’s largest shareholders, he now wants seats on the board to get a closer look at Iger’s work turning around its various businesses.
For the rest of us mere pikers, the options market provides an excellent way to make small bets on beaten-down stocks like Disney.
Here are my thoughts on the four puts from yesterday’s trading.
Two in the Top 100
Two of yesterday's four unusually active Disney put options had double-digit Vol/OI ratios. In the introduction, I mentioned the one in the top 10 with unusually active put options. There was another in the top 100.
The options in question were the Jan. 19/2024 $120 strike and the Jan. 19/2024 $160 strike. The former’s Vol/OI ratio was 18.30x, while the latter was 11.19x.
Both were well in the money, with Disney’s closing price a tad shy of $85. With 100 days to expiration (3.5 months), if DIS stock moves sideways, the 100 shares for each contract would undoubtedly be put to you, and you’d be forced to buy at inflated prices.
However, the premium income obtained by selling these puts could generate an excellent return depending on what happens in the next few weeks.
The $120 put had a premium income of $3,495 for an annualized yield of 322%. Of course, with $35 in price appreciation necessary to move above the strike price by the expiry date, the odds are good you’re not going to walk away with that income, but it will reduce your price paid for Disney stock to $85.05, within a dollar of its current share price.
Now, as you probably know, calls are the safer of the two types of options because you have the right, not the obligation, to buy Disney shares at the call’s strike price.
So, as I look at Disney options prices in Thursday morning trading, I see that the ask price for the $85 call is $5.30. In the worst-case scenario, the shares fall to $70 by mid-January, so you’re out $530 or 6.2% of the strike price. If the same thing happens with the $120 put, you’re looking at a $15 loss per share or $1,500.
Ouch.
But consider this: What if Disney stock rises by $15 over the next 100 days? You’re buying 100 shares at an 18% discount from today. More if it moves higher than that.
Ultimately, I believe that Peltz wouldn’t be back doing his activist shtick if he thought Disney couldn’t revisit $100 for starters and its March 2021 all-time high of $203.02.
The Other Two Put Options to Consider
The other two puts from yesterday’s trading that were unusually active were the Jan. 19/2024 $105 strike and the Jan. 17/2025 $125 strike.
Let’s deal with the former first. It has the same expiry as the two above but a strike price that’s $15 and $55 lower, respectively. As you would expect, being less in the money, the bid price was $20.10, an annualized yield of 87%. It's still good but much more grounded in reality. With some luck, you could walk away with $2,010 in your pocket.
How so? If Disney announces a deal to sell ABC and its other linear networks before January, you can be sure the share price will increase. Ditto for bringing on another minority partner for ESPN besides Hearst, who owns 20% of the sports network.
While the ABC sale seems closer to happening than the ESPN situation, you never know.
The bottom line is that you’re looking at the same risk/reward proposition as the two higher strike prices.
As for the latter $125 strike, it has 464 days to expire, which is 15 months from now. That’s a reasonable timeframe for some of the abovementioned stuff to play out. Plus, the annualized yield of 37% is the most realistic if you’re interested in income.
On the plus side, you’re looking at a net price paid of $85.20, but you’ve got almost 5x the amount of time to watch your bet play out. On the downside, you’re waiting over a year for an outcome that could go many ways. You just don’t know.
However, all things being equal, and if you don’t mind owning Disney shares as part of the outcome, I would go with the 2025 put option. I believe it gives you the best possibility of making money on your Disney bet.
I expect Disney put options to remain unusually active over the remainder of the year and into 2024 as investors continue to bet on Bob Iger’s success or failure righting the Mouse House.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
