Media giant Warner Bros. Discovery (WBD) sank over 10 percent last week, as the ongoing Hollywood strike impacted the sector. One trader is betting on further weakness ahead.
That’s based on the April 2024 $10 puts. With 225 days until expiration, 10,265 contracts traded compared to a prior open interest of 129, for an 80-fold rise in volume on the trade. The buyer of the puts paid $0.95 to make the bearish bet.
Warner Bros. Discovery stock recently traded for about $11.50. So shares would need to drop about $1.50, or about 13 percent, for the option to move in-the-money. The stock has a 52-week low of $8.82, so there could be more downside ahead from last week’s drop.
Overall, the company has been unprofitable over the past year, although revenues rose by about 5 percent.
Investors remain concerned about the impact of the Hollywood strike, which has shut down production. That could mean a big drop in cash flows, which would impact the company’s ability to service its debt.
Action to take: Shares could be a buy in the low $10 range, where they’d trade at a reasonable value relative to the company’s intellectual properties. At current prices, there may be more downside, and it will take time for the company to fully recover from the strike.
For traders, there could be some sizeable downside in the months ahead. The April $10 puts are reasonably positioned for that downside, and could see mid-double-digit returns in the months ahead.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.