It’s Time to Call an Audible on Hasbro’s (HAS) Unusual Options Activity

Elite quarterbacks are renowned for their instinct and making adjustments as the game evolves. In many ways, options trading follows the same dynamics. Even though the fundamentals may point to one outlook, it's important to adapt to unusual technical dynamics. That may be the case with popular toy manufacturer Hasbro (HAS).

On the surface, HAS stock appears to have it made, at least for the bulls. Currently, the Barchart Technical Opinion indicator rates Hasbro as a 100% Buy. It doesn’t get better than that. Since the beginning of the year, shares gained almost 40% of equity value. In the trailing month, HAS moved up over 5%, continuing its run of good form.

Fundamentally, a strong second-quarter earnings report got folks excited about HAS stock. The toy company — which is known for iconic products like Mr. Potato Head and Rubik’s Cube — posted earnings per share of $1.22, beating the consensus view of 78 cents. On the top line, Hasbro rang up sales of $995.3 million, exceeding Wall Street’s view by 5.5%.

Not surprisingly, analysts have been encouraged by HAS stock, with many reiterating their Buy ratings. At the moment, Barchart shows that out of 10 analysts, seven of them rate shares optimistically: six Strong Buys and one Moderate Buy. The other three ratings are holds.

Nevertheless, not every detail is auspicious. On the financial front, sales have been slipping relative to prior years’ results. While the aforementioned $995.3 million in revenue beat expectations, it was also down 17.7% on a year-over-year basis. Looking at HAS stock technically, the equity printed what appears to be a shooting star formation, which has negative implications according to John J. Murphy’s book “Technical Analysis of the Financial Markets."

With that in mind, it may be time to call an audible.

Unusual Options Activity Confirms Pensive Nature of HAS Stock

Generally speaking, it’s best to avoid betting against the experts. They have access to the best resources and information, along with many years of experience. Still, I’m a big believer that the market is the ultimate arbiter — and it appears that the market is giving off possible sentiment reversal signals.

One clue comes from Barchart’s unusual stock options volume screener. For Hasbro, total volume hit 6,098 contracts versus an open interest reading of 67,168 contracts. Compared to the trailing one-month average metric, Monday’s volume stood at 429.34% up. So, participation in Hasbro’s derivatives has gained steam but is that necessarily a positive?

Based on the put/call volume ratio of 7.07, the answer doesn’t appear to be pleasant. Call volume only reached 756 contracts. The other 5,342 contracts represented puts. What’s interesting about Monday’s data is that in the prior two sessions, the put/call ratio averaged around 0.57; that is, traders were transacting more call options than puts.

One wrinkle to consider, though, is that net trade sentiment on Monday clocked in at $71,100 in favor of the bulls, according to Barchart’s options flow. This screener exclusively focuses on big block transactions so it shouldn’t be ignored. Nevertheless, most of the major bullish transactions appear to be sold puts, which is another wrinkle to factor in.

Selling a put is considered a net credit strategy. By receiving the premium upfront, put sellers (or writers) underwrite the risk that HAS stock in this case won’t fall lower. It’s equivalent to punting the ball on fourth down to give your defense better field position. By punting, you’re underwriting the risk that the other team’s offense won’t march up the field and score.

That’s not exactly the gutsiest call a coach can make — it’s rather predictable, actually. Therefore, I’m not entirely sold that HAS stock can swing higher from here. The options flow data also lends credence that the aforementioned shooting star is a risk factor to watch.

A Bear Call Spread Could Be the Key to Success

Given the declining sales and potential reversal signal in the technical chart, HAS stock might be running out of gas. That’s not to say that shares will outright collapse. Both analysts and retail investors apparently favor Hasbro. It’s just that the company might not have the capability of scoring, especially after moving up 40% YTD.

Having said that, the smarter move may be to deploy a bull call spread, the equivalent of a prevent defense in football. Here, we’re going to underwrite the risk that HAS stock will not score a quick six. Specifically, we can generate income off a sold call and cap off this risk with a bought call of the same expiration date but at a higher strike price.

One idea that caught my eye was as follows for calls expiring Sept. 20, 2024:

• Sell the $70 call at a bid of 75 cents per contract.
• Buy the $72.50 call at an ask of 25 cents per contract.
• Breakeven lands at $70.50.
• Max profit is 50 cents per contract ($50 after multiplying 100 shares).
• Max loss is $2 ($200 after multiplying 100 shares).
• The risk-reward ratio is 4 to 1 (for every $1 of income earned, $4 is at risk).

With this setup, HAS stock simply must stay below $70.50 at expiration (this Friday). Better yet, if the security falls below the lower strike price of $70, the trader will be able to keep the maximum reward. Ultimately, the goal is for both options to expire worthless, enabling you to walk away with the $50 premium.

Certainly, it’s not the most exciting idea available. But it may be the most sensible option given current market dynamics.