Yesterday’s rally was good for our portfolio. In fact, the past two days on Wall Street left us feeling confident in the long-term bullish trend in the market.
We bought shares of The Walt Disney Company (NYSE:DIS) in December of 2019, and the market’s jump higher has given us a chance to generate some income using a covered call.
We still like owning DIS, and we are bullish on the stock long term, however, there’s no denying that its technical formation is keeping it down. By selling a call against DIS, we can put the stock to work in our portfolio.
Why did DIS drop after earnings?
DIS dropped as news of the COVID-19 outbreak started to spread in late January, but it recovered some of that value in the run-up to its early February earnings report.
The company did well, beating both earnings per share and revenue estimates. DIS’s new streaming service was a big part of that increase in revenue.
But in its outlook for the next quarter, the company said it would be negatively impacted by the COVID-19 outbreak. Investors took that as a queue to exit the stock and lock in their gains, pushing the stock lower after its report.
However, as we’ve seen from Apple, Inc.’s (NASDAQ:AAPL) performance this week, the negative impact of COVID-19 doesn’t need to be a black mark for a company that is still performing well in other areas.
Next month, DIS will launch Disney Plus in India, and analysts at Wells Fargo expect DIS to gain six million subscribers from the expansion this year.
Things are still looking up for DIS, so we’re happy to hold the stock. But based on its technical picture, we don’t expect it to recover from its early February drop all at once.
Over One Hill and Onto the Next
In early February, DIS formed down-trending resistance. In the run-up to its earnings report, it overcame that resistance at the $138 level. After the profit taking from earnings, the stock struggled with new resistance in the $142-$144 range.
In the chart below, you can see that DIS was rejected at its new resistance level last week, but in Tuesday’s pullback, it tapped old resistance at $138 as support. Now that DIS has bounced off support, it could develop some momentum and push higher.
Daily Chart of The Walt Disney Company (DIS) — Chart Source: TradingView
We think DIS still needs to see a strong launch of Disney Plus in India before it can break above its down-trending resistance, so we feel comfortable selling a covered call against the stock while it’s rising. The stock’s bullishness will actually increase the premium we can collect by selling a call option.
With a strike price at its other resistance level of $146, we can be reasonably sure we won’t have our shares called away at expiration.
An expiration in early March will help increase traders’ chance of success, and it should earn them a decent premium as well.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.