MAT Analysis

Update 11/18/2015: MAT moved up rather than down after earnings were published. I've exited during expiration week.

Sjares rose by 8.5% over 34 days, or a +91% annual rate. The options position produced a -57.7% loss on debit for a -619% annual rate.

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The toy company Mattel Inc. (MAT), headquartered in El Segundo, California, publishes earnings Thursday after the closing bell.

[MAT in Wikipedia]

MAT

I shall use the NOV series of options, which trades for the last time 36 days hence, on Nov. 20.

Ranges

Implied volatility stands at 53%, which is 3.1 times the VIX, a measure of volatility of the S&P 500 index. MAT’s volatility stands in the 97th percentile of its annual range.

Ranges implied by options and earnings

Week	SD1 68.2%	SD2 95%	Earns
Upper	25.87	29.56	23.66
Lower	18.49	14.80	20.70
Gain/loss	16.6%	33.3%

Implied volatility 1 and 2 standard deviations; maximum earns move
The Trade

I shall structure the trade using a bearish strategy, based on expectations of a negative earnings surprise and also a tendency over the past year for the price to decline immediately after earnings announcements.

Bear call spread, short the $23 calls and long the $24 calls,
sold for a credit and expiring Nov. 21.
Probability of expiring out-of-the-money

NOV	Strike	OTM
	23	63.5%

The premium is $0.33, which is 33% of the width of the position’s wing. The stock at the time of purchase was priced at $22.25.

The risk/reward ratio is 2.3:1.

The position is profitable up to 75 cents above the entry price. The biggest immediate move after each of the past four earnings announcements was $1.48, and the average was $0.81.

Decision for My Account

I've opened a position in MAT as described above.

-- Tim Bovee, Portland, Oregon, Oct. 15, 2015

References

Tradecraft: Playing the odds to build winning stock market trades from options, a description of how I trade, can be read here.

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Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decisions for his or her own account, and take responsibility for the consequences.

License



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Based on a work at www.timbovee.com.