Friday, September 13, 2013

DIS: Magic Kingdom bull play

Update 9/24/2013: DIS fell below the stop/loss level set when I entered the trade and I've closed the position for a loss. 

My reward/risk ratio was 0.63, prompting me to sell immediately rather than holding in the hope of a better price. Generally, I'll sell immediately if the ratio is less than 1.0, and attempt a tactical exit if it is 1.0 or better.

The stock when I closed the position was 3.5% below its entry price at the close. The position lasted for 11 days, and the decline was 116% annualized.

The bull put options spread produced a 16.6% loss on risk, or -551.2% annualized.

Update 9/13/2013: DIS showed enough momentum at the close for me to open a bull position, despite a decline from the day's peak of $67.03 down to $66.57 in the 3:25 five-minute block. The price remained well above the open.

One piece of analysis that persuaded to make the trade was the fact that at the close DIS continued to trade at the top of the fair-price zone on today's 30-minute chart. The zone encompasses 68.2% of transactions surrounding the most-traded price, which was $65.78. At the close DIS was in the process of adding to a higher most-traded price, somewhere between $66.73 and $66.91.

I structured the trade as bull put spreads sold for credit and expiring in October. The maximum yield on risk at expiration is 16.9%, the leverage is 4:1, and the hedge provides a 3.3% cushion of profitability at expiration.

The Walt Disney Co. (DIS) is near to completing, or perhaps already has completed, its second correction within an uptrend that began in October 2011. That uptrend is part of a larger-scale uptrend that began, along with most of the market, in 2009.

That's a long way of saying that DIS follows the S&P 500 with a high degree of fidelity. It is an avatar of sorts for the market as a whole.
DIS 3 years daily bars

In my chart analysis, I'll focus on the more immediate uptrend, the one that began on Oct. 4, 2011 from $28.19.

The momentum carried DIS to a trend high of $67.89 on May 16, from which a correction began.

Let's put the discussion in an Elliott wave context.

The present wave within the uptrend beginning in 2009 is wave III, using the Roman numeral to indicate a higher magnitude move.

Wave III, in turn, deconstructs to wave 1 up to $53.40 on Sept. 25 2012, a wave 2 correction down to $46.53 on Nov. 9, 2012, wave 3 up to $67.89 on May 16, a wave 4 correction down to $60.41 on Aug. 28, and the present wave 5 that hit a high of $66.35 on Thursday, the day that DIS broke above its 20-day price channel, bringing it within sight of my screening techniques.

DIS confirmed its breakout today by continuing to trade above its 20-day price channel. However, it remains below the end point of wave 3, leaving open the possibility that the correction may not be complete.

The fact that the price remains below the uptrend's price channel makes me even more skeptical that wave 5 is underway. But the momentum of the stock's 7.3% rise over four days argues that wave 5 has in fact kicked off dramatically.

One thing is certain: When wave 5 does begin, it will face a limit on how high it can go.

Elliott wave doctrine requires that wave 3 cannot be the shortest of the three rising waves in an uptrend. Wave 1 carried the price up by $25.21, and wave 3 rose by $21.36. Therefore, wave 5 cannot be longer than wave 3's $21.36.
If wave 4 did indeed end at $60.41, that means DIS can only go to $81.77, at maximum, before a major reversal of the rise from 2009 commences. At minimum, wave 5 must exceed the wave 3 top of $67.89.

From the current price of $66.25 three hours before the closing bell, DIS has upside potential of between 2.5% and 23.4%. That's a wide range, but even it at the low end, it is enough potential profit to make a trade worth my while.

And DIS does have a record of success.

This is the eighth bull signal since DIS began its wave III rise in 2011. Five of the 11 completed signals were successful, yielding on average 9.6% over 55 days. The two unsuccessful trades lost on average 6.5% over 15 days.

Within the present smaller scale wave 3, which began in November 2012, DIS has completed three bull signals. Two made a profit averaging 11.1% over 50 days. One lost money, 4% over 22 days.

Disney, headquartered in Burbank, California, is more than the theme parks and kid films and TV shows of the Magic Kingdom. It is a major media conglomerate owning the sports network ESPN, the major over-the-air network ABC and a publisher, Hyperion Books.

A bit of the magic has rubbed off on analysts, who collectively come down at a positive 17% enthusiasm rating.

Disney reports return on equity of 14% with a fairly low level of debt amounting to 28% of equity.

The company has been profitable in each of the last 12 quarters. Earnings tend to peak in the third quarters, which showed rising profits over the year before in 2012 and 2013. Earnings have surprised to the upside 10 times and to the downside twice, back in 2010 and 2011.

Institutions own 63% of shares, which are priced above par. It takes $2.64 in shares to control a dollar in sales.

DIS on average trades 10.5 million shares a day, sufficient to support a good selection of option strike prices spaced $2.50 apart with four-figure open interest. The front-month at-the-money bid/ask spread on calls is narrow at 1.7%.

Implied volatility stands at 20%, in the bottom half of the six-month range. It has been falling since early September.

Options are pricing in confidence that 68.2% of trades will fall between $62.65 and $70.17 over the next month, for a potential gain or loss of 5.7%, and between $64.61 and $68.21 over the next week.

Options are trading actively today, with volume on both calls and puts running at about triple the five-day average.

DIS next publishes earnings on Nov. 4. The stock goes ex-dividend in December for an annual paying yielding 1.13% at today's prices.

Decision for my account: Despite the ambiguities of the chart, I intend to open a bull position in DIS if the upside intraday momentum continues in the last half hour before the closing bell. I find the momentum of the last four days to be convincing, and the fifth-wave upside potential to be enticing.

Also, the options grid will allow me to hedge my position as protection against a reversal while leveraging to allow for a decent profit even if wave 5 proves to be stunted.

I'll update this analysis with my final decision near the market close.


My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. StockCharts has a good explainer. The principal practioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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