Electronic Arts Stock Options Bull Places a Risky Long-Term Bet

Call ratio traders face theoretically unlimited losses

Dec 12, 2017 at 3:01 PM
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Call options are outpacing put options on Electronic Arts Inc. (NASDAQ:EA) today by a more than 3-to-1 margin. In fact, the single-day put/call volume ratio of 0.28 is pacing in the 5th annual percentile. And while the video game stock is trading down 0.6% at $107.31 following a bearish brokerage note, one options trader appears to be betting on a bounce to record highs next year.

Specifically, the June 120 and 135 calls are most active so far. Trade-Alert suggests the two longer-term options are being used to initiate a call ratio spread for an initial net debit of $1.47. By selling to open the two higher-strike calls for each lower-strike call, this speculator expects EA to close right at $135 at June options expiration -- a 26% pop from current levels.

In this best-case scenario, she can pocket the maximum potential reward of $13.53 (difference between the two strikes minus the net debit). Should EA settle at or below $120, risk is limited to the initial cash outlay. However, a rally above $135 could result in theoretically unlimited losses, considering one of the sold calls is uncovered.

Widening the sentiment scope reveals options bulls have taken a more traditional route in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), EA's 10-day call/put volume ratio of 9.46 ranks in the 100th annual percentile, meaning calls have been bought to open over puts at a faster-than-usual clip.

This optimism is shared among analysts, too, which isn't too surprising considering EA is up almost 37% year-to-date. Plus, the stock's pullback from its Aug. 31 record high of $122.79 has found a firm foothold atop the 50-week moving average -- a trendline that hasn't been breached on a weekly closing basis since May 2016.

Specifically, 15 of 18 brokerages maintain a "buy" or better rating on EA, while the average 12-month price target of $127.64 stands at an 18.5% premium to current trading levels. And today, though Goldman Sachs removed Electronic Arts from its "conviction buy" list -- and waxed optimistic on sector peer Activision Blizzard -- it maintained its "buy" rating and $136 price target. BofA-Merrill Lynch, on the other hand, yesterday cut its EA price target to $130 from $137, citing poor sales of the "Star Wars: Battlefront II" game.

 

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