Play Puts on EA Stock's Potential Pullback

Options are incredibly cheap right now

Digital Content Manager
Dec 12, 2019 at 11:45 AM
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Video game concern Electronic Arts Inc (NASDAQ:EA) has had an impressive run on the charts in recent months, tacking on 12.5% since its early October lows, and clocking an eight-month high of $104.96 today. During this race higher however, EA ran straight into a long-term trendline that could, if past is precedent, bring its recent rally to a head. 

The trendline in question is the stock's 80-week moving average, which EA has come within one standard deviation of 10 other times in the last 15 years, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. Four weeks after nine of these 10 signals, the stock was lower, averaging a 7.46% drop. From its current perch, a similar move would send the security at $97.13, just south of its 80-day moving average -- a trendline EA hasn't closed south of since mid-October. 

EA Chart Dec 12

Another indicator that EA's surge may be short-lived is the stock's 14-day Relative Strength Index (RSI) of 65, which sits just on the cusp of overbought. This could mean a short-term dip is in the cards. 

Should some of this negative price action come to fruition, a round of analyst downgrades could help push the shares lower too. Currently, 15 brokerage firms call the stock a "buy" or better, while eight say "hold." Plus, the consensus 12-month price target of $110.40 hasn't been touched by the equity since November 2018. 

Drilling down, it looks like short-covering may have driven EA's latest run higher. In the last two reporting periods, short interest dropped 12.8%, and the 6.62 million shares sold short now represent only 2.3% of the stock's available float. 

For those wanting to get in on Electronic Art's next move with options, now might be the time. EA's Schaeffer's Volatility Index (SVI) of 23% sits lower than all but 2% of readings from the past year. This means options players have been pricing in incredibly low volatility expectations of late. 

 

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