Playing With The Toy Makers

This summer is going to be the summer of the toy maker.

With such earth-shaking movies as X-Men Origins: Wolverine, Transformers: Revenge of the Fallen, and G.I. Joe: The Rise of Cobra all slated to hit the silver screen this summer, the toy manufacturers are going to be having a field day with the sales that will follow what could be a blockbuster summer.

And the company that is poised to benefit from this onslaught of movies is Hasbro Inc. ( HAS - news - people ). The company already has toys being produced in relation to all three storylines, and children will undoubtedly be lining up for their own set of Wolverine claws.

Hoover's states that Hasbro is the No. 2 toy maker in the U.S. and the producer of such childhood favorites as G.I. Joe, Play-Doh, Tonka toys, Nerf balls and My Little Pony. Besides toys, Hasbro makes board games under its Milton Bradley, Cranium and Parker Brothers brands, as well as trading cards such as Magic: The Gathering (through its Wizards of the Coast unit) and Dungeons&Dragons. Hasbro also makes Star Wars action figures and is the licensee of action figures and games for the prequels, as well as toys related to Disney ( DIS - news - people ) and other movie and television characters.

The shares of HAS have rallied from their March low of $21.14, gaining more than 26%, only to struggle to reclaim support at their 20-day moving average. The security is also sitting on support at its 20-week moving average at the 26 level--a trend line that has buoyed the shares since the beginning of April.

Despite the security's impressive strength recently, options players are extremely skeptical of the shares. The Schaeffer's put/call open interest ratio for HAS stands at 1.35, as put open interest outnumbers call open interest among options slated to expire in less than three months. This reading is higher than three-quarters of all the readings taken during the past 52 weeks. In other words, short-term options players have been more pessimistically aligned toward HAS just 25% of the time during the past year.

Furthermore, both the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE) have reported an increase in put trading. During the past 10 trading sessions, two puts have been purchased to open for every one call purchased to open. This ratio of puts to calls is higher than 78% of all those taken during the past year, underscoring the growing skepticism toward the equity.

Wall Street also has its doubts about the company, as the firm has earned four "buy" ratings, eight "holds," and one "strong sell," according to Zacks. This configuration leaves ample room for potential upgrades from analysts, which could buoy the stock higher.

Should this pessimistic sentiment begin to unwind, the security could benefit from a significant rally as the bulls rush to jump on this outperformer. Traders should consider the stock's July or October 25 call to take advantage of the stock's uptrend.

Elsewhere within the toy maker sector, we find Mattel Inc. ( MAT - news - people ), which is the No. 1 toy maker in the world. Its products include Barbie dolls, Fisher-Price toys, Hot Wheels and Matchbox cars, American Girl dolls and books and various Sesame Street, Barney, Ferrari and other licensed items.

Mattel also produces action figures and toys based on Walt Disney movies. Mattel is currently trying to reduce its reliance on its biggest customers--Wal-Mart ( WMT - news - people ), Toys "R" Us and Target ( TGT - news - people )--through its own catalog and Internet sales.

Like HAS, the shares of MAT are on the upswing. The stock has rallied from its March low of $10.36 to gain more than 45%. The security has recently begun to consolidate sideways in the 15-15.50 region and is bouncing off support at its 10- and 20-day moving averages. However, one concern is that the shares are struggling with resistance at their declining 10-month moving average--a trend line MAT has closed only one month above since July 2007.

From a sentiment perspective, there are some signs of growing optimism. The ISE and CBOE have reported that 4.4 calls have been purchased to open for every put purchased to open during the past 50 trading sessions. This reading is higher than 78% of all those taken during the past year, indicating a rising optimism among options players.

However, Wall Street is far from enthusiastic about the company. The stock has earned four "strong buy" ratings and seven "holds," according to Zacks. Any upgrades from this pessimistic bunch could add some lift to the shares.

In fact, if MAT can conquer long-term resistance at its 10-month moving average, it could cause a shift in sentiment toward the bulls' camp, creating enough momentum for a sizable rally in the shares. Traders should keep a close watch on this trend line and use it as a signal for the potential initiation of a long intermediate-term call position.

One last toy maker worth taking a look at is JAKKS Pacific Inc. ( JAKK - news - people ). One of the U.S.'s top toy companies, the firm makes and sells action figures (including an exclusive license for World Wrestling Entertainment ( WWE - news - people ) figures), activity sets (Flying Colors), die-cast and plastic cars (Road Champs, Remco), preschool toys (Child Guidance), pens and markers (Pentech) and fashion dolls. Its inexpensive toys are sold to U.S. retailers such as Target, Toys "R" Us and Wal-Mart; hobby stores; and other retailers.

It's been a rough year for JAKK. The stock has suffered a steep decline since its April 2008 peak, creating a series of lower highs and lower lows. The stock has dropped more than 58%, guided lower by its 10- and 20-week moving averages. The stock was recently rejected by resistance at the 14 level and is now approaching former support in the 9.50-10 region.

Not surprisingly, the security is blanketed with pessimistic sentiment. The Schaeffer's put/call open interest ratio for JAKK of 3.34 is at an annual pessimistic peak, indicating that investors have not been more bearishly aligned toward the shares at any other time during the past year. What's more, the ISE has reported that 25 puts have been purchased to open for every one call purchased to open during the past 10 trading sessions. This ratio of puts to calls is higher than 92% of all those taken during the past year, pointing to an extreme level of pessimism.

Furthermore, six of the eight analysts following JAKK rate it a "hold," while more than 7% of the company's total float has been sold short. This wealth of pessimism is to be expected on an underperforming security. Aggressive traders looking for a sudden decline in the shares should consider the equity's June 12.50 put.