Disney Looks to Earnings Guidance for More Rally Fuel

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It's time again to return to the mouse's house, as Walt Disney (NYSE: DIS ) steps into the earnings limelight next week. DIS stock is up more than 14% in the past two months, as traders cheer the acquisition of 21st Century Fox (NYSE: FOX ) assets. The company remains a long-term buy, but can an overextended DIS stock still find room to rally after earnings?

The market can remain irrational longer than you can remain solvent - words to live by. Right now, DIS stock is attempting to consolidate its recent gains after winning the acquisition battle with Comcast (NASDAQ: CMCSA ) for FOX properties.

The shares have found support at $112, and DIS stock has trended along this support for the past week. That said, DIS is still trading on the verge of overbought territory, with it's 14-day relative-strength index (RSI) hovering just shy of 70. Short-term DIS bulls looking to bet on Disney earnings will want to see this reading come down and DIS consolidate further over the next three days.

But just because DIS is on the verge of being overbought doesn't mean the stock can't rally further. Solid third-quarter earnings and guidance could make all the difference, especially now that Disney has key Fox assets under its control.

Click to Enlarge By the numbers, Wall Street is expecting DIS earnings of $1.95 per share, up from $1.58 per share a year ago. Revenue is expected to rise 7.7% to $15.34 billion. Looking ahead to guidance, Disney is releasing the much anticipated blockbuster film Avengers: Infinity War on blu-ray this quarter alongside a string of other blockbuster releases. As such, guidance could surprise analyst expectations.

Speaking of expectations, analysts and investors remain divided on DIS stock. According to Thomson/First Call, half of the 30 analysts following Disney rate the shares a "hold" or worse. The 12-month consensus price target rests at $117.57. In other words, there is plenty of room for both price target increases and ratings upgrades for DIS stock.

In the options pits, there is a wealth of negativity levied against DIS stock. For instance, the August put/call open interest ratio comes in at 1.43. This reading is well above all those taken ahead of the last three Disney earnings reports.

Overall, August DIS options implied volatility is pricing in a potential post earnings move of about 4.4% for DIS stock. This places the upper bound near $118, while the lower bound lies near $107.

2 Trades for Disney Stock

Call Spread: Traders looking to bet on a Disney stock rally might consider an Aug $115/$116 call spread. At last check, this spread was offered at 29 cents, or $29 per pair of contracts. Breakeven lies at $115.29, while a maximum profit of 71 cents, or $71 per pair of contracts - a potential 140% return - is possible if Disney stock closes at or above $116 when August options expire.

Put Sell: If you are looking for a more neutral-to-bullish strategy on DIS options, then an Aug $105 put is a good starting place. At last check, this put was bid at 43 cents, or $43 per contract.

As long as Disney stock trades above $105 through expiration, traders pursuing this strategy will keep the $43 premium. However, if DIS trades below $105 ahead of expiration, you could be assigned 100 shares for each contract sold at a price of $105 per share.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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The post Disney Looks to Earnings Guidance for More Rally Fuel appeared first on InvestorPlace .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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