- Disney stock price has been performing poorly recently, leading to concerns about the stock’s medium-term prospects.
- The company’s brand and unique assets can translate into long-term strength, but the lack of a dividend makes waiting out difficult issues risky.
- The article provides a way to create a synthetic dividend strategy on Disney using covered calls (and potentially cash-covered puts).
- Reinvesting the proceeds from this strategy in DIS over an extended period can help you compound gains and provide a margin of safety not otherwise available.
The article you’ve provided discusses a strategy for investors interested in The Walt Disney Company (DIS) stock. It suggests using a “synthetic dividend” strategy through covered call options to potentially generate income and compound gains, particularly since Disney does not pay regular dividends. Here’s a summary of the key points:
- Background: The article begins by noting Disney’s recent stock performance, which has been less than stellar. Despite being a beloved brand, Disney does not pay dividends.
- Synthetic Dividend Strategy: The author suggests using covered call options to create a “synthetic dividend.” This strategy involves selling call options on Disney stock, generating income from premiums received. By reinvesting the proceeds from these options, investors can effectively create their own dividend income.
- Advantages of Synthetic Dividend: The article argues that a synthetic dividend can be superior to a traditional dividend, as it doesn’t require the company to divert cash flow away from investments. This is important for Disney, given its recent increased spending on parks and experiences.
- Benefits of Compounding: The author emphasizes the power of compounding gains over time, particularly in the face of various challenges and risks that Disney currently faces.
- Risk Mitigation: The strategy is seen as a way to mitigate risks associated with Disney’s stock, including lawsuits, competition, management transitions, and financial performance concerns.
- Rolling Covered Calls: The article explains that a key aspect of this strategy is to “roll” covered call contracts. This involves monitoring the position and, when necessary, buying back existing calls and selling new ones with different strike prices and maturities.
- Alternative Strategies: Besides traditional covered calls, the article briefly mentions the “wheel strategy,” which involves using cash-covered puts after being assigned shares from a covered call. This is a more advanced approach.
- Risks and Caution: The article highlights that using derivatives like covered calls involves risks, including liquidity risk, execution risk, and potential tax consequences. It strongly advises against this strategy for inexperienced investors.
- Conclusion: The author concludes that the synthetic dividend strategy can be a way to make holding Disney stock more tolerable during challenging times, potentially improving long-term returns.
It’s important to note that options trading, including covered calls, can be complex and risky. Investors should have a good understanding of options and their associated risks before implementing such strategies. Additionally, the strategy described in the article may not be suitable for all investors, and individual financial goals and risk tolerance should be considered. Always consult with a financial advisor or conduct thorough research before making investment decisions.
