How I'm Playing a Covered-Call Trade on Disney Amid Market Uncertainty
I'm looking to scalp another profit on my Disney trade as the economy continues to weaken.
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The market has started to stabilize in recent trading sessions after a sharp four-week losing streak that briefly put the S&P 500 into official correction territory late last week before the recent rebound.
The S&P VIX Index (VIX) managed to close Thursday at under the 20 level after spiking recently.
After two years of plus-20% returns from the S&P 500, I continue to believe the most likely scenario for equities is flattish or slightly down for 2025. Having my portfolio heavily in covered-call positions should easily outperform the overall market in this type of environment. Sticking with that topic, Friday is option expiration day. This means I will have numerous decisions to make.
For my covered-call positions that expire in the money thanks to significant appreciation in the underlying security over the option duration, it is a relatively easy decision. Since I don’t tend to chase, I will just happily take those profits.
For positions where the stock is either slightly under the strike price for either the March or April expiration dates, like some holdings in Acadia Pharmaceuticals ACAD or Viridian Therapeutics, Inc. VRDN, I will just "roll" the options forward. I will do this because I continue to like the underlying equities, and I get to pick up another option premium by doing so.
When a stock has moved up slightly since the covered-call orders were executed, that's where things can get a bit tricky. The options will expire in the money, but a decision needs to be made whether this stock merits a "rinse, wash and repeat" covered-call trade. Take Disney DIS for instance. The Mouse House was my option trade of the week back in July 2024. The stock has done little since then but my covered-call position in that trade utilized the March $95 call strikes. Even though the stock has traded roughly flat over the option duration, I will make a solid 10% profit from the trade, barring a big down day in the market on Friday, as my covered calls will expire in the money at market close.
The economy has weakened since last summer with the Atlanta Fed’s GDPNow projecting an economic contraction for the first quarter of this year. The shares reflect this with a near 20% decline since their recent highs in late November. The company is restructuring its media business, laying off some folks at ABC News and letting Major League Baseball go after the 2025 season at ESPN. Its streaming business remains challenged.
That said, the company seems much more focused on its core businesses, is busily dropping most of its DEI efforts which was an irritant to a good portion of its core customer base and appears to have a good slate of movies in the hopper. Earnings surged during the firm’s most recently reported quarter in February on 5% revenue growth. The stock has a reasonable valuation, especially compared to the overall S&P 500 and the analyst firm community is largely enthusiastic about Disney’s current prospects.
Therefore, it looks like I will continue to play the covered-call trade around the stock, most likely utilizing the November or December 2024 $95 call strikes. This will allow me to scalp another nice profit around this iconic American company, even if the stock continues to go nowhere.
At the time of publication, Jensen was long ACAD, VRDN and DIS.
