An Options Trader's Pre-Earnings Take on Disney, NVIDIA, Gilead Sciences

Tons of high-profile companies are heading to the earnings booth this week. Three of the biggest are Walt Disney Co (NYSE:DIS), NVIDIA Corporation (NASDAQ:NVDA), and Gilead Sciences, Inc. (NASDAQ:GILD). Below are some thoughts on the three stocks, and my take on where the shares could be headed after earnings.

Walt Disney Could Suffer an Earnings Correction

Background: DIS will report earnings after the close tomorrow, but has reacted to the upside in only 14 of the last 28 quarters. Focusing on the past eight earnings reactions, the shares have averaged a single-session move of 4% in either direction, while the weekly 2/10 at-the-money (ATM) straddle is pricing in a 3% swing, according to Trade-Alert.

Sentiment: Short interest on DIS has collapsed after peaking in September 2015, now representing just 1.5% of its float. Meanwhile, optimism among options traders has reached an extreme in the past 10 weeks, as the stock's 50-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) call/put volume ratio of 2.54 ranks in the 99th annual percentile -- with a lofty amount of call open interest at the near-the-money 110 strike for the weekly 2/10 and standard February series. However, analysts remain divided, with 10 "strong buys" and three "buys" narrowly outweighing 10 "hold" ratings and two "strong sells."

Technicals: DIS shares are up 16.5% year-over-year to trade at $109.41. Since mid-October, the stock has enjoyed an uninterrupted 21% rally without a correction -- suggesting they may be extended on the upside, but remain in a solid uptrend.

My Take: I would be less inclined to bet on further upside. The potential for a "sell the news"-type event, or a complete earnings miss, could see Walt Disney Co shares fail at the 110 strike, and possibly correct to $103, which would be a 38.2% retracement of the October-February rally.

 

NVIDIA Post-Earnings Move Could Create Buying Opportunity

Background: NVDA is scheduled to report earnings Thursday after the close. The stock has resolved to the upside following 17 of the past 27 quarterly reports, and after the last eight, they've swung an average of 12.5% in the subsequent session, with 88% positive. The weekly 2/10 ATM straddle is pricing in an 8.5% swing this time around.

Sentiment: Short interest has nearly halved during the last two reporting periods. NVDA's short-interest ratio (SIR) is just 1.70, suggesting short covering may be limited in the near term. A healthy accumulation of call open interest in the front two-weeks' series sits just overhead at the 120 strike, which coincides with the stock's December all-time high. Elsewhere, NVDA sports a price-earnings ratio of 59 on a 12-month trailing basis.

Technicals: NVDA was the best performing stock on the S&P 500 Index (SPX) in 2016, and is up 343% year-over-year. The shares have been in a strong uptrend, guided higher by the 40-day moving average over the past year, but on a very short-term basis, are overbought -- as measured by the 10-day Relative Strength Index (RSI) of 70.7.

My Take: Option prices appear cheap, relative to the historical earnings mean, but could be skewed from the last earnings reaction of +29.8%. I see a limited upside earnings reaction, but any downside reactions could be a buying opportunity if NVIDIA Corporation dips back to the 40-day moving average.

 

Gilead Sciences Earnings Might Put $60 Back in Play

Background: GILD will hit the earnings stage tomorrow night. The drug stock has finished up on the day subsequent to reporting earnings 17 times in the past 28 quarters, but less than half the time in the last eight. The average post-event single-session move within this narrower time frame has been 5.2%, while the stock's weekly 2/10 ATM straddle is pricing in a 4.2% swing.

Sentiment: Short interest on GILD is hovering near its lowest level in more than a decade, at just 1.1% of its float. The most recent round of short covering spanned from February 2016 through September, but the shares still slid lower. Analysts are nevertheless optimistic, with 12 of 20 handing out a "buy" or better rating, and not a single "sell" on the books. In the options arena, heavy near-term put open interest at the 70, 67.50, and 65 strikes could act as magnets on a negative report. On the other hand, a large accumulation of call open interest at the February 75 strike could represent the upside target.

Technicals: GILD has been one of the bigger laggards in the biotech space, down 15% year-over-year. The stock remains in a downtrend, too, guided by the declining 80- and 200-day moving averages. Also, the shares recently bounced off the 50% retracement of their 2010 low and 2015 high. The round $60 level is about half that peak, and could be a downside target.

My Take: With Gilead Sciences, Inc. still lagging most of its peers and not looking technically sound, I see more downside risk on an adverse earnings reaction, as the stacked puts below could come into play.

 

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