Renewed analyst and increased technical support warn of a “game over” situation for Electronic Arts Inc. (NASDAQ:EA) bears. But for Electronic Arts stock bulls, a modified spread combination in lieu of owning shares looks like the winning play. Let me explain.
It has been a couple months since I last wrote about EA. And over that time, a prior period of less-than-fun price behavior in Electronic Arts stock has compounded matters for bullish investors, but in a good sort of way if we’re to believe Wall Street, as well as EA’s stock chart.
On Monday, analysts at Bank of Montreal upgraded shares of EA to “Outperform” while hiking its price target from $97 to $130, which implies upside of around 16% at the close of trade.
The firm sees bearish sentiment over the Star Wars: Battlefront 2 in-game purchasing strategy as temporary and misplaced. BMO also believes Electronic Arts best-in-class esports strategy and overall solid product mix, make EA shares a buying opportunity.
And BMO isn’t alone either.
Last week, broker Wedbush issued a similar note as it reiterated its “Outperform” rating on Electronic Arts stock based on the belief a December sales rebound and strong franchise pipeline support their thesis a sell-off in shares of EA the last couple months is overdone.
EA Stock Weekly Chart
Aside from Wall Street’s view, the Electronic Arts stock chart also looks very supportive for bullish investors. No doubt EA has already enjoyed a very nice rally the past couple years. Since 2014, shares are up in excess of 400%. But rather than think those gains are extended, the weekly price chart suggests EA stock is once again, in position for higher prices.
Over the last few months, shares of Electronic Arts have technically stalled. But the pause in the trend has provided a healthy reprieve as a decent-size corrective consolidation of around 19% in depth has formed.
Supporting the idea a low has occurred, EA’s price action has also undercut the low of a prior cup-shaped base. That establishes a bullish reset of the weekly base count. Coupled with last month’s bullish hammer candlestick, the price action is supportive of a new first-stage base that will lead to an eventual breakout and confirm a “game over” situation for bears overstaying their welcome.
EA Stock Bullish Range Butterfly
Back in November I detailed a bullishly positioned but range-bound long butterfly as a follow-up to a wildly successful spread combination that netted $2.80 for a return of 175%. The recent attempt is still in play, but with little time on the calendar and the spread breaking even, the opportunity to roll out makes sense. Yet, given EA’s increased support on the price chart and an earnings event later this month, widening and modifying the butterfly combination also becomes more approachable in order to adjust for potential price volatility.
Checking Electronic Arts options Monday evening and with shares at $113.22, the Feb $115/$125/$130 call combination for $2.55 is favored. Below $115, the full debit or the equivalent of 2.25% EA stock risk is on table, while the expiration break-even is $117.55 or roughly 3.8% higher. The butterfly’s sweet spot at $125 would allow a max profit of $7.45 to be captured. That amounts to a return of nearly 300% if Electronic Arts is able to tack on an additional 10.4% at expiration.
Lastly and unlike a traditional and symmetrical butterfly, because the embedded bull call spread is twice as large as the structured bear vertical, a bullish trader using this combination would still walk away with a profit of $2.45 if EA stock turns in a “game over” style performance for bears and winds up above the butterfly.
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.
