DISCA is ripe for a short squeeze
Media stock Discovery, Inc. (NASDAQ:DISCA) was last seen trading at $25.17 today, a little more than a week from the company's third-quarter earnings report, due out Wednesday Nov. 3. Ahead of the event, put traders have been growing bolder.
On the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders bought to open more than three puts for every call on the equity in the past two weeks. The resulting 10-day put/call volume ratio of 3.09 is in the 97th percentile of its annual range, indicating DISCA traders are showing a much healthier-than-usual appetite for bearish bets of late.
Discovery stock has been facing off with its year-to-date breakeven level since May. Above sits DISCA's 40-day moving average, while the $24 level has emerged as a floor in recent weeks. Should a breakout occur, a short squeeze could be the catalyst; a healthy 15.5% of the stock's total available float is sold short.
Overall, the only real fundamental issue investors should be cautious of is Discovery stock’s poor balance sheet, which holds $3.06 billion in cash and $15.05 billion. However, Discovery stock has solid potential as a recovery play at its current valuation. DISCA trades at a decent price-earnings ratio of 15.06 at the moment, but what makes Discovery stock an attractive investment is its forward price-earnings ratio of 7.82.
In addition, Discovery has generated strong top- and bottom-line growth over the past couple of years, with the exception of 2020. DISCA's revenues are up 64% since fiscal 2017 despite experiencing a 4% decline in fiscal 2020. Discovery’s net income has also increased by $1.7 billion since reporting $337 million in net losses for fiscal 2017. Nonetheless, Discovery's net income is still down 11% since fiscal 2019, after the company’s net income decreased by $312 million in fiscal 2020, giving them a significant margin for recovery.
Now seems like an ideal time to weigh in on DISCA's next move higher with options. The stock's Schaeffer's Volatility Index (SVI) of 45% sits in the 12th percentile of readings from the past 12 months, meaning options players are pricing in low volatility expectations. If options traders are so inclined, DISCA's
Schaeffer's Volatility Scorecard (SVS) comes in at a relatively high 94 (out of 100). In other words, the security has exceeded options traders' volatility expectations in the last year.