One options trader is making a big bet Disney will pop 10% on earnings this week

Published Mon, Nov 6 202310:32 AM EST

We'll touch on Berkshire Hathaway's weekend report, review some interesting companies reporting in the week ahead and then analyze a curious call spread in Disney ahead of earnings. Berkshire reported operating earnings of $10.76 billion on Saturday. The company also reported $157 billion in cash, a new record. The positive way to look at it is that Warren Buffett's businesses are tremendously successful, generate enormous free cash flow and now those cash balances actually earn some interest. A more pessimistic interpretation is that Warren Buffett, Charlie Munger and the rest of the Berkshire investment team are finding short-term treasury yields more appealing than stocks. Here we sit, in the thick of earnings season, should we just "T-Bill and chill"? I absolutely believe that some cash ought to be in short-term treasuries. We hold 5% of our long-only event fund in cash at the moment, and for individuals a larger cash position might be appropriate, but most investors will be primarily invested in stocks and real estate, as Berkshire Hathaway is. Looking at the week ahead In any case, while 5% a year risk-free is attractive, we look to equities for better returns than that…usually. After all, the options market is implying that the companies listed in the table below, all of which report earnings this week, could move 5% or more, either higher or lower, by Friday November 10th. We own the names highlighted in green in our event-driven long-only strategy, and I actually like some of the other names that will be reporting, but find it a bit difficult to chase them here as several are already up so much this year. For example, Celsius , which is very intriguing beverage company growing at 100% per year, is up nearly 68% as I write this year-to-date and trading at a sky-high multiple. Hubspot is growing topline in the mid 25-27% year-over-year, but also, trading at 10 times revenues so it isn't cheap either. I rather like MGM Resorts at 16.5 times full-year EPS estimates, and with it up 13.8% year-to-date, it doesn't feel like it has gotten out of reach. So why don't we own it? Our options market sentiment analysis score is in 75th percentile in terms of risk-adjusted expected returns. Not abysmal, but not good/high conviction enough for us to sell another holding to buy it. Uber is another name that, up more than 90% year-to-date is tough to chase. Notice though that we own Warner Bros Discovery (WBD) , which is down 26% from the January high. Our thinking, and the options sentiment suggested, that earnings might be the catalyst for a turnaround. Our basis is less than $10/share, so far so good. The Disney trade So how about Disney then? At just over 17 times, it's trading at less than a market multiple. Although the company is still sorting out the changing landscape in streaming, parks have been doing well and ESPN has always been one of the most valuable media properties. It seems at least one institutional options trader thinks that earnings might be the catalyst for an upside move in the name. Disney reports Wednesday after the bell. We saw substantial purchases of the November $95/$100 call spread on Friday, including a single trade of 5,562 contracts (details in the chart above). This call spread entails buying the $95 call and selling the $100 call. With Disney trading around $85 a share, apparently someone is willing to bet a small percentage of the current stock price that the stock could pop well over 10% post-earnings — something that hasn't happened since their August 2022 earnings release. DIS YTD mountain Disney, YTD Personally, I'd prefer lower strikes and a bit more time to expiration, both of which would yield a higher probability of profit, but the flip side is those changes would reduce the lottery-ticket like payout in the event DIS rallies well through the $95 strike. DISCLOSURES: (Long ILMN, TTWO, WBD) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.