How to play Disney options ahead of earnings

After last week's big gains, how can you use options to play the markets now? Simpler Trading Senior Managing Director of SimplerStocks Chris Brecher has some ideas. Watch the video above to learn about Brecher's strategies and what he is planning to play Disney (DIS) ahead of the company's fourth quarter earnings release on Wednesday, November 8.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

[AUDIO LOGO]

- It's time now for this week's Options Pit sponsored by Tastytrade. We're looking at what you should consider after the S&P 500 had best week of the year last week. Jared Blikre is here with Chris Brecher, Simpler Trading senior managing director of stocks. Jared.

JARED BLIKRE: Chris, thank you for being here. Let's go to the Yi-Fi Interactive, where I have one of the charts that you've given to us. This is the S&P 500 going back to March of this year. We also have the 200-day moving average, which the market is now just above. We've also had this huge run up and we're seeing the MACD into extended territory to the upside. What are you seeing in the market right now, and how would you express your views through the options market?

CHRIS BRECHER: Well, the first thing, if it wasn't holiday time, I'd be all over shorting the market, or at least looking for an hourly reversal to just buy puts. But because of this time of year when you're overbought at the 200, I'm going to look a lot more at like an SPX butterfly under the market. So I'm looking at-- and the reason I'm doing that instead of buying premium is I just-- it drives me nuts buying premium, and if you're right, but it goes down slowly, especially at this time of year.

So I would rather do something like the 4400, 4200, 4000 put fly for like March. So that way, if the market just sits here because on the one side, you have the bonds going down, which is bad for the markets in the long run, you have the overbought, which is bad for the markets just short term, but you have holiday that might keep it elevated. So I think that's a cool way to play a downside or a drift.

JARED BLIKRE: I hear you about the options market, especially buying premium. Let me move on to another market here. This is Biotech, and here we have the S&P Biotech ETF XBI believe this moving averages at 50. So it's up against that, but we're actually 60% off of the highs that were created in 2021. So a little bit more of a depressed market. But again, in the MACD, we're seeing this pretty rapid rise recently. So what are your-- what are your views on Biotech here and how would you play that?

CHRIS BRECHER: Well, we were looking at different scanners and looking for indexes that have been down the most this year, going on trying to take advantage of the easing of tax law selling. And our favorite was really XBI in the theory that no matter what the markets do, it could bounce anyway because it's so underperformed. The key for me is the overbought condition, how it's worked off. That when it works it off, is it going to have a massive reversal, or is it going to work it off by retaining some kind of bullish structure?

But right now, I'm looking to do spreads in there up at or above the markets. So definitely that's a sector I'd like to buy dips. No doubt about it. In fact, I bought some just now, but not a lot because I'm still waiting for that overbought to be worked off.

JARED BLIKRE: All right. Duly noted. And want to move on here to Disney. We're expecting-- we're expecting the earnings in a couple of days after the close on Wednesday. This is another stock, coincidentally happens to be 60% off of its highs peaked in 2021. What are you seeing in Disney right now?

CHRIS BRECHER: Well, it's sort of neat. I sent a chart earlier saying that I'd be interested in doing a spread. I sent a chart to Yahoo about I'd be interested in doing an upside spread if Disney could fill the gap from Friday. And it's almost filled the gap. So the way I'm looking at playing it is a lot of these earnings trades, if something has rallied into earnings and there's a high bar into earnings and no matter how good the earnings are, it sells off usually.

So if that's why if Disney was up near the highs, I'd be like I'm not going to play it on the upside. I would like to see it under 83, and then play something like an 84, 88, 92 for this week. So that's a real bullish idea, but it's all at $0.78. So it's a 4-point wide risk in $0.78, but I'd much rather see the stock down another $0.90, and shift it to an 87, 91, 95. So I'd rather do it one point lower, but I want to see if it fills that gap.

JARED BLIKRE: All right. Real quick. We got under a minute. We'd like to get your views on the Dow Jones transports. In terms of Dow theory, that's one aspect, but just how are you seeing the transports right now? This is a year to date-- excuse me, year to date and here's a 2-year view.

CHRIS BRECHER: I had the same thing with it overbought, but it's so far under it's daily, it's daily 50 moving average while the MDX is above it. So I want to buy dips in the transports. I know it's looked awful, but I definitely want to buy dips in the transports. Right now, I'd do it with IYT not with the Federal Expresses of the world. Just that's the ETF that includes all the Dow Jones transport stocks.

- OK, Jared Blikre, thanks so much for that along with Chris Brecher.