Are Mattel (NYSE:MAT) Shares Headed “To Infinity … and Beyond”?

Are Mattel <span class= MAT Shares Headed To Infinity … and Beyond? " src="http://farm2.static.flickr.com/1163/3164259562_7213617f71.jpg" alt="" width="263" height="350" />Tuesday morning, Mattel MAT was upgraded at Caris & Company to a “buy” rating from an “above average” designation. The firm also adjusted its 12-month price target to $32 from $29 (representing a change of 46% from current levels) and lifted 2010 earnings estimates by nine cents to $1.75 per share (which is, oddly enough, still below the consensus view of $1.81).

The brokerage noted that MAT shares could benefit from Toy Story 3 revenue, as the Pixar film (which features Barbie and other MAT toys) has set box-office records for the studio. Looking ahead for 2011, the covering analyst expects the company to benefit from the release of Cars 2 and Green Lantern, as well as lower costs for plastic resin.

MAT shares rose initially on this vote of confidence but settled lower on the day, edging back below its 50-day simple moving average. The shares are fighting higher from their early-June bottom but have consolidated around the $22 mark for the last several sessions. Caris’ projected target would place MAT shares at an all-time high; the stock hit its previous peak of $29.71 in April 2007.

While traditional brokers are confined to the scale of “buy,” “hold,” and “sell,” ratings, options traders have access to a full arsenal of strategies to use depending on the situation. These can be fine-tuned depending on an investor’s trading thesis and can be impacted by forces other than just the stock itself (including time and implied volatility). Two option strategies on MAT – one bullish, one bearish – are detailed below. Remember these are hypothetical examples, not recommendations. Consider your risk/reward parameters and trading goals before executing any new trades.

*Prices given as of Tuesday afternoon. MAT was trading at $21.93.

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Bullish Option Strategy: Bull Call Spread

Investors who agree with Caris’ bullish outlook but worry about the stock being stopped out around its 52-week high around $24 could consider a bull call spread. The October 19/24 spread can be bought for a net debit of $3.20 (buying the 19 call, selling the 24 call). The spread buyer’s losses are limited to the premium paid ($3.20) and are capped once MAT breaches the $19 level. On the plus side, the potential gain of $1.80 per spread can be collected if MAT is trading above $24 at expiration. Breakeven at expiration is $22.20; anywhere above this level, the spread will be profitable when the options expire.

Profit/Loss of Mattel (MAT) bull call spread

Bearish Option Strategy: Long Put

Mattel skeptics out there could consider buying January 20 puts for $1.50 apiece. Put buyers risk 100% of the premium paid but have significant reward potential if the stock declines or implied volatility retreats. In this example, gains are theoretically limited to $18.50 (in the unlikely event that MAT has fallen all the way to zero by expiration in six months). Breakeven for this strategy, at expiration, is $18.50 as well.

Profit/Loss of Mattel (MAT) long put