Buy Calls On This Video Game Stock

Options traders are pricing in relatively low volatility expectations for Electronic Arts stock

Nov 8, 2017 at 2:04 PM
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Video game stocks Take-Two Interactive (TTWO) and Electronic Arts Inc. (NASDAQ:EA) are making headlines this week as traders react to the companies' holiday forecasts. Not to mention, peer Activision Blizzard (ATVI) is rallying today on news of strong sales of its new Call of Duty game. While a strong holiday season outlook sent TTWO shares to record highs, EA stock has pulled back in response to a less optimistic outlook. The equity's recent retreat, however, could create a compelling opportunity for options traders, as EA is testing a key trendline with historically bullish implications.

After Electronic Arts' holiday-quarter revenue forecast missed estimates last Wednesday, the stock fell 4.3% to close at $114.47, marking its largest one-day post-earnings drop since late January. The security continued its retreat through yesterday to trade within one standard deviation of its 160-day moving average, docked at $109.81. If past is prologue, the equity's meetup with this trendline could mean good news for EA shares.

According to data compiled by Schaeffer's Senior Quantitative Analyst Rocky White, previous pullbacks to this trendline over the past three years have yielded positive one-month returns 100% of the time, with an impressive average gain of 5%. A jump of this magnitude would send the video game stock up to the $117 neighborhood -- not far from its late August record high of $122.79. It seems that the stock is already making its move higher, too. At last check, EA shares were trading 2.3% higher at $114.28.

Analysts appear confident in Electronic Arts stock's ability to rally, too. By the numbers, 15 of the 19 brokerage firms following the security, rate it a "buy" or "strong buy," with not a single "sell" recommendation in sight.

For speculators who want to roll the dice on another pop higher for EA stock, now is an attractive time to buy premium on short-term EA options, considering they're pricing in relatively low volatility expectations at the moment. The stock's Schaeffer's Volatility Index (SVI) of 25% ranks in the low 31st annual percentile. What's more, the equity's 30-day at-the-money implied volatility of 22.2% ranks in just the 27th percentile of its annual range, which further points to low volatility expectations.

 

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