I like Mattel Inc. I think it is a solid company which has has good earnings, and I happen to believe that the 2013-2014 Christmas season could do well this year since there are a few economic factors which lead me to believe Christmas sales in particular should be up. Mattel Inc. happens to one of the companies that could see benefits from this. My expectation for Mattel in the 3rd quarter is somewhere between $47-$48 per share.
My plan for Tuesday, May 28, 2013 is to put in a limit order for 100 shares of MAT at $45.63 per share. After a $9.99 comission I will pay for this transaction, my cost basis will be $4572.99, or around $45.73 per share. I will also put in a limit order to sell an OCT 19 2013 $44 cash secured put for $1.80 per share, which would give me a premium paid to me of $168.26 after comissions and expenses. This reduces my cost basis to $4404.73, or $44.05 per share. Once I have the 100 shares filled, I will immediately sell an OCT 19 2013 $48 covered call for $1.25 per share, or $113.26 after comissions and expenses. My cost basis has now been reduced to $4291.47, or $42.91 per share.
The premiums are mine to keep no matter what happens.
If the stock reaches $48.01 when the covered call expires, my call will be assigned and I will sell my 100 shares for a total of $4800.00. I will pay expenses of approximately $20 on the assignment of the call, plus $9.99 for the sell. My total proceeds will be $4770.01, or a profit of $478.54, taking into account the premiums already received. The cash secured put expires worthless, but I still get to keep the premium I was paid by the buyer.
If the stock drops to $43.99 I am forced to buy 100 additional shares of MAT at $4400 plus $20 plus $9.99, or a total of 4429.99. In this scenario I am showing a paper loss of $138.52.
If I had simply bought the stock at $45.63 with comissions, and the stock dropped to $43.99, my loss would have been $164 with comissions factored in. BUT, during this time I also received a dividend of $36 on my 100 shares. This means that in the worst case scenario, by selling the cash secured puts and covered calls and buying the stock via the limit order, my loss is reduced to just $128.
Of course, if the stock gains not only did I get to keep my premiums, but I also made more money on the stock than had I simply bought it, held it, and sold it. In the scenario where the stock did better than $48, my covered call was assigned, and I made the $478.54 profit from the entire process, AND also still received my dividend increasing my total gain to $514.54.
I should point out that it is just a matter of my own personal strategy and preference that I NEVER buy puts or calls. I only sell them. This is how I would play MAT at this moment. The ONLY caveat that is if MAT does better than $48 you lose out on those additional gains. But that is the nature of the beast when employing this strategy.
I will write a follow up in October to see where this wound up, so do check back then to see how we fared.