Activision Blizzard: ATVI Looks Strong, So Go Long!

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Last week was a poor showing for many stocks, tech especially, with the Nasdaq-100-tracking PowerShares QQQ Trust (QQQ) getting shot down by about 1%. (And it didn’t look much better on Monday.)

activision blizzard atvi stock

But for constituent and video game developer Activision Blizzard (ATVI), the technical and fundamental action looks very much to be a “game on” situation in front of next week’s earnings.

Thus, bulls have an opportunity in the next few days, which we’ll cover with a trading strategy.

Activision reports earnings for its second quarter on Tuesday, Aug. 4 after the close, and analysts expect ATVI to produce earnings of 8 cents per share after generating profits of 6 cents per share in the year-ago quarter.

ATVI doesn’t play in a fun arena — a single video-game launch can make or break short-term sales results. Just ask the likes of rival Electronic Arts (EA), which reports this Thursday. Activision’s revenues have been mixed; year-over-year, ATVI has managed grow its trailing 12-month sales by 4.5% to $4.6 billion, but they have slipped from $5 billion two years ago.

On the upside, Activision has a strong earnings beat history, topping quarterly forecasts for more than two years. That has no doubt helped encourage investors, especially over the past six quarters. During that period, ATVI stock has finished higher in the immediate aftermath of earnings, with moves ranging from a little more than 1% to nearly 15%. The average increase has been 6.13%, and Activision has featured one standard deviation of wiggle room of 4.78%.

Longer term, ATVI has history slightly better than a coin toss, of 54%, receiving a bid and closing higher.

ATVI Weekly Chart

Activision weekly stock chart
Click to Enlarge
Source: Charts by TradingView

After breaking out above 2008’s all-time highs in early 2014, shares have managed to trade up by a bit more than 35%.

The decent but unspectacular percentage gain performance in ATVI is reinforced by additional base building that’s occurred over this period and which we view as a positive technically looking forward.

After some corrective backing and filling which reset ATVI’s base count in the second half of 2014, shares have established a strong-looking cup or “W” base with handle. The large technical formation has gone on to act as bullish support for a second and much tighter, weekly base-on-base that’s currently attempting to break out in front of next week’s earnings.

ATVI Long Call Strategy

ATVI volatility chart
Click to Enlarge
Source: Charts by TradingView

Before implieds come under (likely) pressure, though, an earnings move will have taken place. What’s more, as underlying volatility is near its range lows, that should help prevent implieds from falling too hard. What’s more with a bit more than a week to ATVI’s earnings report, we can see options premiums are still cheap in relation to past events.

That all said and in viewing ATVI’s stock chart favorably, I like the idea of purchasing a slightly out-of-money long call, which might also allow for a profitable adjustment in front of the earnings event.

Checking the board, one contract which looks attractive enough is the weekly Aug 7 $26.50 call for 43 cents.

This particular long call has a very short maturity attached to it, but it’s also the earnings pure play as it expires three days after ATVI’s earnings release. Simply put, if you wish to play the report’s post-earnings reaction and deal with less extraneous catalysts, this is the most efficient way to do that.

For good measure, let’s say a bullish trader pays 50 cents for a breakeven price of $27 in the weekly Aug 7 $26.50 call. If recent history repeats itself an average, an upside move in ATVI would result in shares trading at $27.20 and yield an expiration profit of 20 cent, or a 40% return.

Of course, if history isn’t so kind, the ATVI call could expire worthless very quickly. With that in mind, I do view a purchase as one that should be approached with an adjustment or exit, for better or worse, in front of the report to reduce risk or lock in a profit or smaller loss than otherwise.

Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


Article printed from InvestorPlace Media, https://investorplace.com/2015/07/activision-blizzard-play-atvi-front-earnings-long-weekly-call-position/.

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