Video game companies like Electronic Arts (NYSE:EA) and Activision (NASDAQ:ATVI) are flourishing in the post-novel coronavirus world. The Street is embracing this bullish narrative by rewarding ATVI and EA stock with robust year-to-date gains that are accelerating as I type.
Far from hurting their business models, the twin trends of social distancing and staying at home have helped. Shut-in consumers have taken to gaming in an effort to stave off boredom. And, those who already play now have a lot more time to conquer dungeons, off baddies, and otherwise level up.
In today’s commentary, we’re focusing on Electronic Arts, but Activision shares follow a similar flight path due to their strong positive correlation.
EA Stock Chart Signals More Gains Ahead
We begin, as always, with the bigger picture. Like a history book, the weekly chart reveals the twists and turns of Electronic Arts for as far back as you want to look. For our purposes, the last five years will suffice. It shows the 2018 record high as well as multiple bottoms carved out during bear markets and nasty corrections.
Up until mid-2018, EA stock found itself in the middle of a secular trend, driving the video game industry to new heights. Mass adoption generated lofty growth projections, increased sales, and a booming share price. Unfortunately, in the back half of 2018, the company’s performance didn’t live up to expectations and EA quickly lost 50% of its value.
But the share price of growing companies can’t be depressed forever. After the halving, EA stock spent a year in base-building mode before finally rising anew. The ascent has accelerated after Covid-19 came to town with really aggressive momentum coming in over the past month. With Monday’s 2.5% gain, the stock is now at a 52-week high and within striking distance of its 2018 record of $151.26.
All major weekly moving averages are rising and there’s been no signs of distribution since mid-March. No matter how you spin it, buyers are in complete control here.
The daily chart adds additional color and detail to the big picture. A series of higher pivot highs and higher pivot lows kicked off in April and has continued through today. The 20-, 50- and 200-day moving averages are all loyally rising below the price, in full support of buyers. In the past week, we’ve seen a sideways base form, full of doji and other narrow-bodied candles suggesting a stalemate between bulls and bears.
The tie was broken Monday with bulls finally gaining control and jamming EA stock through resistance. Volume is also expanding on the session and confirms institutional accumulation is aiding the breakout attempt. Even if a pullback develops over the coming days, it’s impossible not be a buyer on dips. This particular tactic is racking up quite the track record over the past three months.
To narrow down the overwhelming number of options strategies available, let’s use the implied volatility indicator. It reveals whether options are cheap or expensive, and thus, whether it’s more attractive to be a buyer or seller. At 23%, the implied volatility rank sits in the lower quartile of its range, suggesting premiums are low. You can still sell options, mind you, but the payday isn’t all that large.
As such, I’d suggest a long premium play via calls or call spreads.
The Trade: Buy the Sep $135/$140 bull call spread for around $2.30.
It’s a relatively cheap trade structure that offers a balanced risk-reward. The initial cost of $2.30 is the max loss and will be forfeited if EA sits below $135 at expiration. If the stock rises above $140 by mid-September, then you will capture the max gain of $2.70.
For a free trial to the best trading community on the planet and Tyler’s current home, click here! As of this writing, Tyler held neutral options positions in EA.