Bears Blast Electronic Arts Stock Before Earnings

EA stock was oversold heading into today's trading

Karee Venema

Oct 25, 2018 at 10:29 AM

It's been a rough stretch for Electronic Arts Inc. (NASDAQ:EA), with the shares notching just three positive closes so far in October. Overall, EA stock is down 19% month-to-date -- pacing toward its biggest monthly loss since October 2008, when it lost 38.4%. Today, the security is up 3% at $99.12 in early trading, but this bounce may be due to EA's oversold status, with its 14-day Relative Strength Index (RSI) closing last night at 23.

Looking closer at the charts, this recent downtrend began about three months ago, shortly after EA stock topped out at a record high of $151.26 on July 13. The stock gapped 9.8% lower on Aug. 30 on news of a "Battlefield V" delay, slicing below long-term support at its 200-day and 320-day moving averages. Plus, the shares bottomed at a 17-month low of $96.10 yesterday.

ea stock daily chart on oct 25

While analysts have been slow to catch up to this price action, the bear notes are starting to roll in. Stifel, for instance, cut its price target on the video game stock to $137 in mid-October, while SunTrust Robinson slashed its EA target price to $116 from $140 earlier this morning. Overall, though, 19 of 24 brokerages still maintain a "buy" or better rating, while the consensus 12-month price target sits all the way up at $139.96.

Options traders, on the other hand, have been buying to open puts over calls at a quicker-than-usual clip. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), EA's 10-day put/call volume ratio of 1.78 ranks in the 100th annual percentile.

Ahead of Electronic Arts' earnings report, due after the close next Tuesday, Oct. 30, short-term options are pricing in elevated volatility expectations -- per the stock's 30-day at-the-money implied volatility (IV) of 45.8%, which registers in the 99th annual percentile. Meanwhile, EA's 30-day IV skew of 12.9% ranks in the 90th percentile of its 12-month range, meaning short-term puts have rarely been more expensive than their call counterparts, from a volatility perspective.

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