Disney Stock Options Strategies

Disney's (DIS) stock has been range bound since about mid-2015.  The stock failed to break above $120 back in 2015 and hasn't increased past $113 over the last 12 months. This has some long-term investors frustrated.

There is something that investors can do to take advantage of this range-bound situation.  Option strategies such as covered calls and selling puts can allow investors to extract more income from their investment. Think of it as creating your own extra dividends.

I would like to point out that the stock is currently declining from an overbought condition according to the stochastic oscillator.  I think the news of the Fox acquisition is baked into the stock for now.  Investors had plenty of time to digest the benefits of the acquisition. So, my thesis is that the stock will remain range bound and probably drop to around $100 or slightly below.  This has been the low end of the trading range recently. 

Just to be clear, I have a positive view of Disney as a long-term investment.  I just think that the range-bound trading is likely to continue in the near term because the news of the 21st Century Fox (FOXA) acquisition has been digested.  I also think there is a good window of opportunity for options strategies before the next earnings report, which is in August. Earnings could cause a spike in the stock price on better than expected results. 

 

 

Covered Call Strategy

The covered call strategy is to be used when you expect the stock to decline or remain steady by the expiration date.  Since a positive earnings report could cause a spike in the stock price we'll look at an expiration date prior to August. 

Consider selling the July 20 $108 call option.  This has premium of about $134, which you will collect when you sell the option. If the price of the stock remains below $108 by July 20, then the call will expire worthless.  This is what we want since the call option was sold.  In that case, you profited from the premium that sold of about $134. That is like getting an extra dividend payment.   

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Disclosure: The article is for informational purposes only (not a solicitation to buy or sell stocks). I am not a registered investment advisor. Investors should do their own research or consult a ...

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