Media message

  • DISCA behaved bearishly near key level
  • Options activity hints at liquidations, not new positions
  • Stock a possible takeover candidate?

Yesterday morning, options activity may have tipped many traders off to action in a stock, even if it probably wasn’t what many expected.

Discovery (DISCA), the “non-fiction” (read: reality/educational) media company that operates a lot more than the Discovery Channel (everything from the Food Network to the Oprah Winfrey Network), stood out yesterday for a couple of reasons:

●Recent relative price weakness

●Neutral-to-bearish options activity

Longs may have protective sell-stop orders below the June–August lows.

The thing is, that options action probably came across as bullish at first glance. When DISCA appeared on LiveAction scans for unusual call volume (twice as much as average) and a high call/put ratio (seven times more calls traded than puts), it would have been natural to assume bulls were getting busy.

But a quick look at the options chain suggested the biggest chunk of that call volume was more about traders getting out of positions rather than getting into them:  

Discovery (DISCA) options chain, 8/27/19. Unusual Options Activity, high call volume. Volume exceeded open interest

Source: Power E*TRADE

The bulk of the day’s volume occurred in two options, the October 30 and 32.5 calls, both of which had volume greater than their open interest (OI) levels. That’s important, because OI represents the number of unclosed options positions: If traders enter new options positions (long or short), OI rises; if traders close existing options positions, OI falls. Volume can be high either way, but high volume when traders are getting into a market has a different implication than high volume when they’re getting out of it.

The October 30 call, for example, had volume of 2,600 contracts. If all that volume was traders putting on new positions, OI would have had to increase by at least the same amount. The fact that the contract’s OI is only 1,000 contracts means at least some of that volume was traders liquidating existing positions.

So, if the call activity wasn’t necessarily the bullish signal it may have appeared to be, what was going on in DISCA. Yesterday the stock broke below its June and early–August lows (around $26.70), part of a two-week period of underperformance during which it lost roughly -10% compared to around -2% for the S&P 500 (SPX):

Discovery (DISCA), 12/26/18–8/27/19. Discovery (DISCA) price chart. Relative weakness near recent lows.

Source: Power E*TRADE

Here’s what may be going through the minds of some traders piecing this all together: People who got long during the June rally and didn’t take profits in July, as well as traders who bought the mid-August bounce, may have protective sell-stop orders below the June–August lows. If another down day or two triggers those stops, some traders will be looking for DISCA to challenge other lows, including those from March (around $26) and December (around $24).

Short sellers always have to be careful about overstaying their welcome, but in this case they may want to be especially vigilant, since some analysts see DISCA as a potential takeover target (ViacomCBS is reportedly in acquisition mode),1 and others have argued DISCA is entering “bargain” territory based on its fundamentals and Q2 growth numbers.2

Short-term opportunities are just that—short. Experienced traders know it’s wise to look ahead to the next one, even if it’s in the opposite direction.

Today’s numbers (all times ET): EIA Petroleum Status Report (10:30 a.m.), Survey of Business Uncertainty (11 a.m.).

Today’s earnings include: Lululemon Athletica (LULU), Ollie's Bargain Outlet (OLLI), Five Below (FIVE), PVH (PVH), Shoe Carnival (SCVL), Tiffany & (TIF), Guess (GES), Williams-Sonoma (WSM).


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1 Reuters. ViacomCBS is just the beginning of Shari Redstone's media deals. 8/13/19.

2 The Motley Fool. 2 Insanely Cheap Media Stocks to Buy Right Now. 8/13/19.

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