Walt Disney Co (DIS)

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Disney's Spike Attracts Covered Call And Short Put Option Income Players
By: Barchart | January 13, 2023

The Walt Disney Company stock (DIS) is up over 12% so far this year, with recent news about Nelson Peltz's proxy fight to become Chairman. That is attracting investors who short DIS stock out-of-the-money covered calls for income.

Disney stock is up 3.66% at $99.65 on Thursday, Jan. 12, as Nelson Peltz, an activist investor from Trian Partners sent a letter to the Board on Jan. 11 saying he will nominate himself as the Chairman. The company responded on Jan. 11 saying that it had nominated Mark Parker instead, an existing Board member.

One of the interesting things that have piqued the market's interest is that Peltz says that he will ask the company to reinstate the dividend by 2025. That has helped push the stock higher. Moreover, Disney has not yet set the date of the annual meeting. This suggests that Disney might be in the process of negotiating with Trian Partners to allow Peltz to join the Board.

As a result, some value investors are looking closely at shorting out-of-the-money (OTM) call options, as well as shorting cash-secured OTM puts.

Short DIS Calls As An Income Plays

For example, the $110 strike price call options for expiration on Feb. 10, 2023, closed on Thursday, Jan. 11 at $1.36 at the midprice per call contract.

That means that the investor at today's price (Jan. 12) of $99.65 makes an immediate yield of 1.36% for just 29 days until expiration. On an annualized basis that works out to 16.38% if it can be repeated each month.


DIS Calls - Expiring Feb. 10, 2023, - Barchart - As of Jan. 12, 2023

That means that the investor who buys 100 shares for $9,965 and puts in an order to “sell to open” 1 call contract at the $110 strike price immediately receives $136.00 in his brokerage account. Moreover, if the stock rises to $110 by Feb. 10, 2023, then the investor will also make an additional $1,035, or $1,171 in total including the call option premium received. That represents a total return of 11.75% (i.e., $1,175/$9,965).

The Barchart option chain above shows that many investors are piling into this particular strike price. The open interest is now 327 contracts, up by 288 call option contracts in the past day. This shows that investors expect the stock will likely rise significantly over the next month.

This risk is if DIS stock rises well over $111.36. That is the breakeven point (i.e., $110+1.36 premium received) by Feb. 10. The covered call investor will miss out on any upside over that price.

Short OTM Puts As An Income Play

Another way to play this is to short out-of-the-money puts. At least that way, the investor might not experience upside risk when the stock rises over the covered call strike price. In this case, the investor sells puts at a price well below today's price in order to collect income.

For example, the $90 puts trade for $1.35 at the midprice for the Feb. 10, 2023 expiration period. That means that the investor may have to buy the stock at $90.00 if it falls to that price or lower by Feb. 10. As a result, they have to secure $9,000 in cash or margin with the brokerage firm (i.e., $90 x 100 shares) in order to receive the put premium with a “sell to open” order at $90.00

This actually leads to a higher yield for the investor. For example, if we divide $135 by $9,000, the investor's immediate return is 1.50%. On an annualized basis, the investor can make 18% if it can be repeated over a full year. That is better than the 16.38% return from the covered call annualized return.

However, the short put investor cannot make a 10% unrealized or realized capital gain like the covered call investor can.

The only risk that the short put investor has is if the stock falls more than $10 to below $88.65 (i.e., $90 strike price less $1.35 premium) by Feb. 10. That represents a decline of 11%, or essentially wiping out all the gains the stock has made this year. This does not seem very likely now that Peltz is pushing to get himself elected as Chairman.

The bottom line is that investors can play this spike in DIS stock. They can make between 16.38% and 18.0% by shorting out-of-the-money DIS calls or puts respectively on an annualized basis.

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