Media stocks got pummeled on Wednesday, after Discovery Communications disappointed investors with weak guidance and meager ad revenue growth. That could spell bad news to come in CBS's earnings report, which the media giant is slated to release on Wednesday after the bell.
And in fact, even ahead of Discovery Communications' earnings report, one trader sold a huge number of calls on CBS, in an apparent expectation that earnings will not take the stock much higher.
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Specifically, one trader sold 60,000 CBS December 55-strike calls for $2.10 per share, likely against a long stock position, in a trade initiated by the seller rather than the buyer. Since a call gives its holder the right to buy a given security at a given time for a given price, by selling these calls, the trader is expressing an expectation that CBS shares will not rise above $55 by more than the $2.10 being collected, or above $57.10 by December expiration. Below that level, this trade will be profitable, with the maximum profit of $12.6 million being realized if CBS shares stay below $55.00.
So if this firm is long stock, it will not technically see losses on this trade, no matter how high CBS shares rise. Yet between the $55 selling price mandated by the options contract, and the $2.10 collected per share, profits are effectively capped at $57.10.
"Basically what we're seeing ahead of earnings is not a lot of bullish sentiment," Mike Khouw of Dash Financial said Monday on "Fast Money." "This is somebody who's willing to let go of a big chunk of stock."
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