It’s “game on” at Electronic Arts Inc. (NASDAQ:EA)! With a couple less-favorable wildcards in the mix, though, the EA stock options market looks like the way to go. Let me explain.
Personally, I think it’s hard to find much wrong with Electronic Arts without nitpicking. To kick things off, there’s its better-than-expected earnings report and recent two-year $1.2 billion buyback program.
Electronic Arts is also well-positioned to continue riding a strong secular trend for the gaming industry. The outlook even appears more formidable these days with the new kid on the block, eSports, growing by leaps and bounds and an obvious growth avenue for EA stock. Oh yeah, go EA!
There’s also the price chart of EA stock. I’ll discuss that shortly, but I don’t mind stating it looks pretty supportive for bulls.
But for those that are going to nitpick, Electronic Arts isn’t going to win “Best in Show” either.
EA is trailing rival Activision Blizzard, Inc. (NASDAQ:ATVI) in the eSports arena. The company also apparently fumbled with the roll-out of Nintendo Co., Ltd (ADR) (OTCMKTS:NTDOY) Switch. Electronic Arts is also being sacked by some critics with the 18th iteration of its Madden NFL franchise release for being a weak update.
Lastly and if that weren’t enough, as InvestorPlace’s Dana Blankenhorn notes too, EA’s lucrative licensing business is also a double-edge sword. And as EA stock isn’t entirely cheap fundamentally, any unwanted changes in those existing agreements could be even more detrimental to shares of Electronic Arts.
EA Stock Weekly Chart
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First, in July Electronic Arts broke out of a cup-like or slightly wide flat multi-week base on heavy and above-average volume. That’s bullish.
Secondly, the base-on-base pattern is just the second consolidation since a corrective base count reset back in 2016. The low count allows us to be less concerned with a technical failure than if EA stock had piled up multiple bases without any corrections.
I also like that the smaller flat base of the last four weeks has successfully tested the cup breakout with stochastics setting up in a neutral to bullish manner.
On the other hand and in playing the devil’s advocate, some might argue the failure of EA stock to move aggressively higher after last month’s breakout could be a hint of future weakness. I can’t say that hasn’t crossed my mind.
As well, given Electronic Arts earnings are out of the way and a seasonally challenging calendar upon us, upside momentum could be tough to come by. That being said, playing a bit more defensively within the constructs of a well-priced bullish range in EA stock makes sense to this strategist.
EA Stock Bullish Range Butterfly
Checking Electronic Arts options and shares at $118.18, I like the idea of buying the Sept $115/$120/$125 butterfly for up to $1.60.
As with any options strategy, there are limitations which need to be addressed. In this case, a positioned butterfly is not a play to buy if the trader is extremely bullish on EA stock. Ultimately, above $125 at expiration and if left unadjusted, the spread would forfeit the full debit.
But if you’re agreeable with what’s been presented and see the opportunity for limited upside in EA stock, a shorter-term profit range from $116.60 to $123.40 looks attractive in our opinion.
If shares of EA were to sit at the current levels into expiration the trader would realize a profit of about $1.55. The profit is a result of the embedded $115/$120 bull call spread expanding in price to an intrinsic value of $3.18 as the higher bearish vertical goes out worthless.
Better yet, if EA stock was to finish at $120 and near its all-time-highs on expiration day, the max capture of $3.40 would be fully-realized. Net, net this looks like an interesting way to profit in EA with a bit more game than buying shares.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities 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. . For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits and feel free to click here to learn more about how to design better positions using options!
