Take your position in Disney (NYSE: DIS)

Walt Disney (NYSE: DIS) – the corporate parent of Mickey Mouse, Pixar, the newly-defunct Miramax, Disneyworld, Marvel Comics, ESPN, ABC and other iconic brands – reports earnings tomorrow. The media giant had a tough year in 2009, with earnings per share dropping 20% to 1.82 from its record high of $2.28 per share in 2008.  Additionally, total revenue was off 4% for the year.

Moving forward into 2010, with global economies hopefully continuing to stabilize, DIS hopes to bring a little more joy to its shareholders. In the works is a theme park in Shanghai, which could be a huge bet and potential payoff for DIS, as long as China remains strong (the growth picture certainly doesn’t look as strong there as once thought, as the government tightens to curtail any bubbles). The largest city in China, Shanghai has a population of more than 20 million people and growing.  It is often viewed as the center of finance and trading in China. Disney has already expanded its empire into Asia, as it already operates a park in Hong Kong.

New ABC series including Modern Family, The Middle, Flash Forward, and Cougar Town have been well-received this season and Disney’s movie divisions also have some cool looking movies in the works such as Alice in Wonderland, The Price of Persia: The Sands of Time, The Sorcerer’s Apprentice, and Toy Story 3.

As for the shares, they have been a bit choppy of late and is off three-plus dollars since hitting a new 52 week high on 12/31/2009l; that’s a drop of almost 10%.

Analysts, meanwhile, are mixed on DIS, with nine recommending it as a “strong buy,” four as a “moderate buy,” 12 as a “hold,” one “sell,” and three “strong sell.” Based on the analysts covering DIS, the consensus earnings estimate is $0.39 per share, and the high and low estimates are $0.51 and $0.34, respectively.  Personally, I think the company’s results will come in near the high end.

Technically speaking, last week the stock finally broke out of the bearish channel it was but it still remains below its 20- and 50-day simple moving averages, which are situated around $30.25 and $31.05, respectively.  The shares also appear to be drawn to support around the $29.00 level.

I do not believe DIS is overbought or oversold in the near term. The downward momentum we have seen in the past couple of days seems to be normalizing, which is a good thing if you are bullish.

I also do not believe the observed volatility is abnormal. DIS has been returning to a more ‘typical’ behavioral pattern since the elevated volatility state it has experienced over the past year and a half.

The observed 30 day historical volatility of DIS is about 21% and the mean of the implied volatility for front-month options is about 33%. This elevation is typical ahead of a report and one that should be an important one for DIS.

The 200-day moving average is way down around $27.30.  In a recovery off the bottom in what is supposed to be a “bullish” market, I prefer to see stocks continue to stay above that average.

Disney, in normal situations and in a quasi-normal macro market environments (unlike the one we saw at the end of 2008 and early 2009), tends to be a relatively quiet stock around earnings.  Typically, the stock moves less than 3%, with a couple 4.5% moves here and there. That would equal a move of less than $1.20 and chances are that it will move less.

I also like the recent correction we have had in the broad market and while I feel we could go a little lower, I am comfortable with beginning to sell some at-the-money puts to begin my systematic acquisition of stock. So with that said, I am going to take a slightly aggressive position with DIS and sell the Feb 29/26 put spread for 40 cents. This spread reduces my risk down to $2.60 and gives me the potential to make 15% on my risk. If the stock drops sharply, I will consider risking a $1.00 in the trade, but only if the stock begins to break below 28.

Much of the Disney conglomerate does have a high sensitivity to economic slowdown, although some of its media properties may offer a bit of a buffer, namely movies and TV.  Buying DIS, however, is essentially placing a bet on recovery.

For more on DIS:

Sector Update: Consumer

MidnightTrader’s Analyst Notebook: DIS

Volatility Explodes in the Market, Walt Disney (DIS) Sees Call Buying