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The Walt Disney Company Sees a Surge in Put Volume

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Is DIS poised for further downside in the near term?

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The Walt Disney Company (NYSE:DIS) is following the broader market's path lower today, shedding about 0.6% to trade at $66.60as of 1:44 p.m. EDT. Meanwhile, pessimistic traders have converged on the blue-chip stock in the options pits, as around 9,000 puts have crossed the tape so far -- more than double the norm.

Garnering notable attention is the October 65 strike, which has seen over 3,800 contracts change hands at a volume-weighted average price (VWAP) of $0.84. Since the bulk of the puts traded at the ask price -- and implied volatility has ticked higher -- it's likely that new long positions have been added here. Additionally, data from the International Securities Exchange (ISE) confirms the presence of buy-to-open activity.
In other words, traders will profit with each step DIS takes below breakeven at $64.16 (strike price less the VWAP) by October expiration. This would entail a 3.7% drop from the security's current price. The delta for this put sits at negative 0.33, implying it has a 1-in-3 chance of moving into the money ahead of the close on October 18.

Should the entertainment giant remain north of the strike price between now and then, the most today's put buyers risk losing is the initial premium paid. Even more comforting, the stock's Schaeffer's Volatility Index (SVI) of 18% ranks lower than 65% of similar readings taken during the past 12 months, implying DIS' near-term options are fairly inexpensive right now, historically speaking.

Today's decline aside, Walt Disney still sports a year-to-date advance of roughly 34%, and has bested the broader S&P 500 (INDEXSP:.INX) on a relative-strength basis during the most recent two-month time frame. The shares gained 2.4% on September 12 alone, after CEO Jay Rasulo said the firm will boost its share buybacks to between $6 billion and $8 billion in 2014. However, it should be noted that the stock's Relative Strength Index (RSI) of 75 is docked in overbought territory, suggesting a continued pullback could be on the short-term horizon for DIS.

This article by Terri Stridsberg was originally published on Schaeffer's Investment Research.

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