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Electronic Arts (EA) Post-Earnings Slump is an Opportunity

On Tuesday after the bell, EA stepped into the earnings confessional. Results on the top and bottom lines lagged analyst expectations, but bookings came in higher than company estimates. Moreover, EA upped its guidance for FY 2022, as user base growth achieved during the pandemic is expected to remain intact. The Street appeared confused by the report, as the news was greeted by a mix of modest target price increases and decreases. However, the important number is the average $163 target, which is 17% above Friday’s closing price. 

Though the Street appeared mostly relieved that EA’s post-lockdown slump was less than feared, the stock fell for three straight days. But the fall covered a modest 2%, as daily lows were well supported by the 50-day moving average. This trendline, which is turning higher for the first time in two months, sits above the $137 level. Meanwhile, the 200-day moving average is in place above $135. With this solid downside support in play, we are looking at a credit spread with the short strike below the 200-day at the 135 strike.

If you agree that EA will stay above its 200-day moving average, consider the following trade that relies on the stock remaining above $135 through expiration in five weeks.

Buy to Open EA 18Jun21 130 Put (EA210618P130)
Sell to Open EA 18Jun21 135 Put (EA210618P135) for a credit of $1.20 (selling a vertical)

This credit is $0.06 less than the mid-point of the option spread when EA was trading at $138.62. Unless the stock rallies quickly from here, you should be able to get close to this amount.

Your commission on this trade will be only $1.30 per spread.  Each spread would then yield $118.70. This trade reduces your buying power by $500 and makes your net investment $381.30 ($500 – $118.70).  If EA closes above $135 on June 18, both options will expire worthless and your return on the spread would be 31% ($118.70 / $381.30).

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