As Disney gears up to report earnings this Wednesday, we’ve pinpointed an options strategy in response to the buzz.
Despite a downward revision of the consensus EPS estimate by 12.38%, a superior Earnings ESP of +1.59% indicates that the most accurate analysts expect Disney to outperform. This, combined with Disney’s consistent earnings history, sets the stage for a Long Call Butterfly spread – a play that profits from a moderate stock price rise with limited risk:
To execute a Long Call Butterfly spread:
- Buy one In-The-Money (ITM) call option with a strike price below the current stock price.
- Sell two At-The-Money (ATM) call options at the current stock price.
- Buy one Out-Of-The-Money (OTM) call option with a strike price above the current stock price, creating a symmetrical spread.
Select an expiration shortly post-earnings to capitalize on the expected volatility. Remember, the size of your position should match your risk tolerance.
Here’s a hypothetical example:
Recommended:
- Disney is trading at $84.00.
- Buy 1 ITM Call Option with a strike price of $80.00.
- Sell 2 ATM Call Options with a strike price of $84.00.
- Buy 1 OTM Call Option with a strike price of $88.00.
- All options have the same expiration date, ideally the week following the earnings release.
Your maximum profit is achieved if Disney’s stock moves significantly higher. Your potential losses are limited to the net cost of establishing the spread. This strategy thrives on a substantial move in Disney’s stock price while containing risk, making it an attractive choice for an earnings event.
