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Toys Can Deliver a Gain of More Than 90%

Toys Can Deliver a Gain of More Than 90%

A toy maker delivered a surprise to Wall Street. TheStreet reported,

Mattel Inc. (NASDAQ: MAT) shares reached their highest level in five months […] after the toymaker posted stronger-than-expected fourth-quarter earnings thanks in part to the best sales for its iconic Barbie doll in at least five years.

MAT daily stock chart

Mattel posted a surprise profit of 4 cents per share for the three months ended in December, against a Wall Street forecast of a 16 cents per share loss, even as revenues fell 5.4% to $1.52 billion.

Barbie sales, however, surged 15% from the same period last year as one of the world’s most-recognized toys continued to benefit for a make-over that reflects the growing diversity of its customer base. Hot Wheels sales, Mattel’s other top brand, rose 12% to $286.8 million.

“In terms of brand highlights, 2018 was a great year for Barbie, which sustained growth and continued momentum globally. Barbie worldwide gross sales were up 15% both for the quarter and the full year in constant currency,” said CEO Ynon Kreiz told investors on a conference call [after earnings were released].

Barbie was the number one global fashion doll property in 2018 according to NPD. We look forward to celebrating her 60th anniversary throughout 2019 with a number of exciting product launches and events.”

The notable weak spot in the quarter, however, was the 15% year-on-year decline in sales for Fisher-Price and Thomas & Friends, to $352.2 million, which Kreiz said was largely linked to the liquidation of Toys R Us in the autumn of last year.

“Fisher Price was one of the Mattel brands most heavily impacted by the liquidation of Toys “R” Us as well as challenges we have faced in China,” he said. “As the effects of Toys “R” Us moderate and we work through channel inventory in China, the brand will be in a better position to restore growth.”

While the gain in the stock was impressive, the stock has been in a down trend for some time and there is no way to know if this news will be enough to reverse that trend.

MAT weekly chart

However, the gain did push the price up to a price level that proved to be significant resistance last summer. A break above those prices could indicate the beginning of a strong up trend. That would be bullish in the long run however the company does still face significant challenges in the short run.

Toys have been under pressure as price pressures hold down potential profits and the bankruptcy of retailer Toys R Us left the industry in the hands of big box retailers who are intent on maximizing their profits.

In the short term, there could be more bullish price action and traders can benefit from that with a strategy that limits risk.

Trading the Trend

When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.

Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up-trend.

bull put spread

Source: The Options Industry Council

This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.

Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long-term investors use to generate income in stocks they own that are unlikely to make large moves.

Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.

A Specific Trade for MAT

Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

For MAT, a bull put spread could be opened with the April 18 put options. This trade can be opened by selling the April 18 $17 put option for about $0.67 and buying the April 18 $19 put for about $0.25.

This trade would result in a credit of $0.42, or $42 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.

The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $2 ($19 – $17). This is multiplied by 100 since each contract covers 100 shares.

Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $158 ($200 – $42).

The potential gain is about 26% of the amount of capital risked. This trade will be open for a relatively short amount of time and the annualized rate of return provides a significant gain.

The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.

To learn more about how options can be used to meet your goals, click here.