Fourth-quarter game-changer?

10/08/20
  • Electronic Arts (EA) pulled back to key support for 3rd time in a month
  • Stock off August highs, but still up more than 40% from March lows
  • Company dominates pro-sports franchises

What’s the difference between a sport and a game?

Sometimes, nothing.

Electronic Arts (EA) is one of the 800-lb. digital gorillas of the gaming world, especially in the pro-sports category—it owns franchises such as Madden NFL, FIFA, NBA, and NHL, all of which were top-10 sellers last month.1

Those who have been playing the EA stock-trading game lately have seen prices take some interesting turns since shares tagged $147.36 in August after a 70% rally. After breaking below the support of its July lows (upper dashed line), the stock tumbled to another support level—the top of the former April–June consolidation around $123.50–$124:

Chart 1: Electronic Arts (EA), 3/13/20–10/7/20. Electronic Arts (EA) price chart. Testing range low.

Source: Power E*TRADE


After a brief bounce, EA tested this support level a second time in mid-September, then rallied almost precisely to the former breakdown level before turning lower over the past four days (-6.6%) to test support for the third time in the past month.

Some traders would argue a stock that repeatedly retreats to test a support level over the course of a few weeks puts pressure on longs (especially those who may have bought on the last bounce and didn’t take profits). But even if this outlook is on the mark, it doesn’t necessarily imply an extended downtrend. Traders on the bullish side of the aisle, for example, may look for near-term downside follow-through to a point within the April–June range (roughly $111–$124, bottom two dashed lines).

With the latest iteration of its FIFA franchise out today (that’s the “other” football, aka soccer, aka the world’s most popular sport), it’s no shock EA has gotten some recent press about the strength of its sports roster—more than 70% of the company’s free cash flow reportedly comes from its sports franchises,2 and it’s probably no coincidence that its presence at the top of sales charts the past couple of months occurred as many sports leagues rebooted their seasons after being shut down by the pandemic.

At this juncture, short-term EA bulls would seem to have to make a choice between anticipating another quick bounce off a still-intact support level or waiting for a possible near-term breakdown and bear-trap—a sharp upside reversal that squeezes shorts who sold on the breakdown.

For options traders, that would make calls even cheaper and puts more expensive than they were yesterday. The following chart shows that while the implied volatility (IV) for October contracts is mostly  below the 30-day average, the IV for the November and December expirations is above average:

Chart 2: Electronic Arts (EA) options implied volatility, 10/7/20. Electronic Arts (EA) options implied volatility (IV). Nov. and Dec. IV above average.

Source: U.S. Census Bureau


That suggests November options, especially, could be on the expensive side, which means shorter-term traders may be looking to sell these options rather than buy them—for example, a bullish trader could sell potentially overpriced puts instead of buying calls, either with the goal of getting assigned the stock or collecting premium. (Yesterday, for example, the roughly at-the-money November $125 puts were trading above $700.)

Today’s numbers (all times ET): Weekly jobless claims (8:30 a.m.).

Today’s earnings include: Acuity Brands (AYI), Delta Air Lines (DAL), Domino's Pizza (DPZ), Helen of Troy (HELE).

 

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1 NPD.com. Top 10 Selling Video Games (Retail and Digital), August 2020; Top 10 Selling Video Games (Retail and Digital), September 2020. 10/7/20.

2 MarketWatch.com. This ‘materially undervalued’ videogames company could become the ESPN of games streaming, according to $1.3 billion investment fund. 10/7/20.

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