Old Fashioned Toys Benefiting From Stay at Home Orders
Trade summary: A bull call spread in Hasbro, Inc. (Nasdaq: HAS) using the April 17 $72.50 call option which can be bought for about $4.10 and the April 17 $75 call could be sold for about $2.60. This trade would cost $1.50 to open, or $150 since each contract covers 100 shares of stock.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $150. The maximum gain is $100 per contract. That is a potential gain of about 66% based on the amount risked in the trade.
Now, let’s look at the details.
Online activities have seen a boost from stay at home orders with traffic on Netflix, Hulu and other streaming services increasing with workplaces and schools closed all across the country. A new entrant in the online streaming category, Disney+ is also reporting gains.
According to Yahoo Finance. “Disney shared in February that Disney+ had amassed 28.6 million subscribers since its launch in November, and it hasn’t updated that number since.
But Forbes reported this week, using data from Antenna, that during just the March 14 to March 16 weekend—when drastic social distancing truly began in many U.S. cities—Disney+ sign-ups tripled compared to the weekend before.”
The company is also growing sales in Europe where it launched recently, at the same time Europe os locking down to protect against the spread of covid-19.
Reports indicate, “the Disney+ boost is also boosting Hasbro’s licensed toy sales, thanks in particular to the rabid popularity of the “Baby Yoda” character from the Disney+ original Star Wars show “The Mandalorian.”
Hasbro’s CEO Goldner told Yahoo Finance that this development addresses an important business concern,
“That’s always been a question: Could streamed content drive merchandising? And clearly Baby Yoda has done that. We saw that in the fourth quarter with some of our product directly related to ‘The Mandalorian.’ Our pre-sales around Baby Yoda have been incredibly robust and we’re very excited to ship Baby Yoda late spring.”
Hasbro is also benefiting from sales of older toys with the company reporting increase of popular games in its portfolio, including Monopoly, Life, Operation and Play-Doh products. Disney merchandise including “Frozen,” other Disney Princess items, and Marvel toys are also getting a boost in sales.
This news could contribute to gains in shares of HAS which have been rallying.
The weekly charts indicates the rally could be sustainable with stochastics providing a buy signal as the price turned up. Stochastics is a popular momentum indicator that often spots turning points in price on weekly charts.
A Specific Trade for HAS
For HAS, the April 17 options allow a trader to gain exposure to the stock. This trade will be open for about six weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.
An April 17 $72.50 call option can be bought for about $4.10 and the April 17 $75 call could be sold for about $2.60. This trade would cost $1.50 to open, or $150 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $150.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in HAS the maximum gain is $1.00 ($75- $72.50= $2.50; 2.50 – $1.50 = $1.00). This represents $100 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $150 to open this trade.
That is a potential gain of about 66% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
A Trade for Short Term Bulls
As with the ownership of any stock, buying HAS could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.