Mon Jun 09 2014
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Walt Disney: 3 Reasons To Write Covered Calls

We started our options trading activity this week by examining the options of a telecommunications stock making new highs. We continue in that spirit today as we explore the options of an entertainment company. The Walt Disney Company (NYSE:DIS) is an entertainment company with a lofty valuation of $ 145B. The Company operates in five business segments: Media Networks, Parks and Resorts, Studio Entertainment, Consumer Products and Interactive.

Waltzing to New Highs

Walt Disney made a new high last Friday when it surged to $ 84.39 from an opening price of $ 83.81. The company went on to record a new high in the trading session yesterday when it surged to a high of $ 84.42 before it settled to close with a 0.31% gain at $ 84.27.

How to Trade DIS Options…

I recommend DIS covered calls and I will provide information about the specific opportunities that Walt Disney covered calls present and how you stand to profit. However, I think it is expedient to provide an analysis of the Walt Disney stock since writing covered calls on a stock require you to own shares of the company.

Reasons to Own Walt Disney Shares

The first reason to own shares of Walt Disney is that the company reported impressive financials in Q2 2014. For instance, the company reported that second quarter diluted earnings increased by 30% to $ 1.08 up from $ 0.83 that was reported in the same quarter last year. Revenue surged by 10% to $ 11.6 billion compared to $ 10.5 billion that was reported in the same quarter last year. It might interest you to know that the second quarter results beat the analyst estimates of $ 0.96 earnings and revenue of $ 11.25 billion. This quality result is one of the reasons behind the bullish run that the company reported recently.

The second reason to own shares of Walt Disney is that the company has an arsenal of renowned brands that it has recently started to monetize. More so, the company is paying serious attention to emerging trends in China and in India. Walt Disney is positioned to record gains from the anticipated boom in the Chinese travel market with its increased investments in the Shanghai Disney Resort. More so, the company has completed the acquisition of the remaining 50% stake in UTV, India.

The third reason to invest in Walt Disney is that the company is committed to rewarding its shareholders with share buybacks and dividends. The company has bought shares worth $ 1.5B in the year-to-date and it plans to purchase up to $ 8B shares this year. In addition, Walt Disney increased its dividend by 14.7% in December to bring its annualized dividend payout to $ 0.86.

…How to Trade DIS Options

Writing covered calls is the best way to profit from the stock and options of Walt Disney. Writing a covered call with a strike price above Walt Disney’s current trading price will entitle us to the premium on the contract, dividends, increase in share price and other accruements from share buybacks. The only downside is that we will not be entitled to any upside that the stock has above the strike price of our contract if the contract is called away.

I recommend writing covered calls on the DIS Jan 2015 95.000 call (DIS150117C00095000), if you have a higher risk-taking quotient, the DIS Jan 2015 90.000 call (DIS150117C00090000) pays a higher options premium. You should note that today’s recommendation is for covered calls only, any attempt to write a naked call is at your own risk.

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