Hasbro (NASDAQ:HAS) investors have had a good September; however, there might be some weakness in the Hasbro stock price in October that would provide good profit-taking opportunities. Specifically, there are two mildly bearish plays in HAS that I want to share with you, as each play could lead to impressive profits.

As the world’s third-largest toy manufacturer, HAS is a play and entertainment company. Earlier in the year, the Hasbro stock price suffered from the bankruptcy of Toys “R” Us, where about 10% of Hasbro sales took place. Yet Q2 earnings and future guidance came well above expectations, and on Sept. 19, the stock saw a 52-week high of $109.60. On Aug. 1, HAS declared a quarterly dividend of a yield of 2.4%, which will be paid out on Nov. 15. The company is regarded as a darling among dividend investors.

On the downside, HAS stock is not immune from the worries of the rest of the U.S. toy industry, which is seeing soft consumer demand and declining sales, partly due to digital forms of entertainment. Many analysts are questioning if Q3 or Q4 for toy companies, including Hasbro, will be as strong as Q2. These analysts attribute some of the Q2 strength to the increased sales growth due to lower prices at the closing Toys “R” Us stores. HAS is expected to report Q3 earnings on Oct. 22, before the market opens. I expect some profit taking before the Hasbro’s Q3 earnings call.

The 52-week price range for Hasbro stock has been $79 (Apr. 23, 2018) — $ 109.6 (Sept. 19, 2018).  Those investors who pay attention to oscillators should note that these technical indicators are giving “overbought” readings. Short-term support for Hasbro is first at $103.1 and then at $99.7; meanwhile, short-term resistance in Hasbro stock is first at $106.8 and then at $109.5.

If you believe that there might be some moderate short-term profit taking in HAS stock prior to its Q3 earnings call, here are the two trades set up for HAS stock (prices are based on Hasbro stock’s closing price of $105.98 on Sept. 27):

Two Moderately Bearish Strategies on Habro Stock

1. If you already own Hasbro stock, consider using an in-the-money (ITM) covered call to protect some of your profits in the stock. For each 100 shares of HAS stock you own, sell a HAS 26 Oct $101 call option, which currently trades at $8.37. The $101 option is in-the-money (ITM), offering more downside protection in case of volatility and a decline in HAS stock around the earnings call season.

This call option would stop trading on Oct. 26, 2018 and expire on Oct. 27.

Assuming you would enter this covered call trade at the closing prices on Thursday, Sept. 27, at expiry, this trade would break even at a HAS stock price of $97.61, and the maximum return would be $339, at a price of $108.5 at expiry (excluding trading commissions and costs).

2. Consider a bear put spread whereby you would purchase a put option at a specific strike price, while also selling the same number of puts with the same expiration date at a lower strike price. Traders use this strategy when they expect moderate downside in a stock within a given period.

Therefore, as the first leg of the bear put spread, I would consider buying a HAS 26 Oct $108 put option, which currently trades at 4.64. At the same time, for the second leg of the bear put spread, sell a HAS 26 Oct $103 put option, which currently trades at 2.79.

These put options would stop trading on Oct. 26, 2018 and expire on Oct. 27.

Your maximum risk would be $185 at a price of $108 at expiry (excluding trading commissions and costs). If HAS stock were to close above the strike price of the long put (i.e., 108), you would lose the entire amount invested in the spread, i.e., $105 (plus trading commissions and costs). In other words, the maximum risk is the net premium paid at the initiation of the spread.

Your maximum return would be $315 at a price of $103 at expiry (excluding trading commissions and costs). In a bear put spread, your maximum profit would be equal to the difference between the two strike prices (i.e., 108-103), minus the net cost of the options (i.e., $1.85).

At expiry, this trade would breakeven at a HAS stock price of $106.15.

The Bottom Line on HAS Stock

I believe moderate profit taking in Hasbro stock is coming. However, as prudent investors, it is always crucial to maintain a clear risk/return profile. Thus, if the drop does not happen, a test of the previous highs and over the $110’s level could be the next eg up.

As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.