Traders Can Benefit from Growth in this Sport
There’s a new sport that is capturing the attention of viewers and businesses around the world. There are already millions of players who love the sport and now their excitement is being funneled into arenas like those that NBA teams play in.
This sport is capturing the attention of the whole world as Ireland’s Independent reported at the end of July:
“The rise of eSports has been fast-paced and dramatic, with a sold-out crowd at New York’s Barclays Centre for this weekend’s Overwatch League (OWL) finals the perfect demonstration of its exploding popularity.
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Competitive gaming has come a long way. Having once been consigned to weekend clubs and small, local competitions, events such as the OWL have proved it is possible to fill arenas with people to watch 12 players battle in one video game.
While games such as Pokemon Go and Fortnite have proved in recent years that almost anyone can be lured into the thrill of gaming on some level, eSports competitions such as the OWL are proving they are viable entertainment for spectators too.
The key, according to league commissioner Nate Nanzer, has been taking an approach to league structure similar to “traditional sports”. In Overwatch’s case that meant city-based teams – not something widely used by other competitions.”
Source: Overwatch League
eSports Is a Growth Industry
eSports is also known as electronic sports, esports, e-sports, competitive gaming, professional gaming, or pro gaming. No matter what the name is, the term describes a form of competition using video games.
Most commonly, eSports take the form of organized, multiplayer video game competitions, particularly between professional players. The most common video game genres associated with eSports are real-time strategy (RTS), first-person shooter (FPS), fighting, and multiplayer online battle arena (MOBA).
Tournaments such as the League of Legends World Championship, The International, the Evolution Championship Series and the Intel Extreme Masters provide live broadcasts of the competition, and prize money to competitors.
Although organized online and offline competitions have long been a part of video game culture, these were largely between amateurs until the late 2000s when participation by professional gamers and spectatorship in these events saw a large surge in popularity.
Many game developers now actively design toward a professional eSport subculture. They hope to drive growth in what could be the fastest growing part of the video game business.
According to MarketWatch.com, “Right now, the entire esports business is under $1 billion,” Take-Two Chief Executive Strauss Zelnick said at a recent technology conference.
“Small market. All of the money is going to ‘League of Legends’. So, you have all the money going to ‘League of Legends,’ which, just as a reminder, we do not own, and then like $0.30 going to ‘Overwatch,’ ‘Dota,’ and a few other things, and then even less than that going to us. And that’s just the truth.”
Of the big three publishers, Activision is the only one that own major intellectual property in esports: “Overwatch.” Otherwise, privately held Valve Corp. owns the “Dota” intellectual property and “League of Legends” is produced by Tencent Holdings Inc.-owned Riot Games.
That could explain why Electronic Arts Inc. (Nasdaq: EA) sold off after the company failed to meet Wall Street’s targets for future quarters.
“The video game titan reported fiscal first-quarter profits of $239 million, which amounts to 95 cents a share, compared with $644 million in the year-earlier period. It reported “net bookings” of $743 million, down from $775 million.
Wall Street uses EA’s operating data called net bookings to model the company’s top line; the company says net bookings are the total number of digital and physical goods combined.
But the company’s guidance may have spooked investors, as it released numbers for the fiscal second quarter and full year that were lower on bookings and profits than Wall Street was looking for. EA stock was down more than 6% during the regular session Friday.
For the fiscal second quarter, analysts model earnings of 58 cents a share on net bookings of $1.23 billion. The company said it expects fiscal second-quarter earnings of roughly 48 cents a share on net bookings of $1.16 billion.
For the full year, EA expects earnings of about $3.55 a share and net bookings of $5.55 billion; analysts had been forecasting earnings of $5.02 a share on bookings of $5.61 billion.”
A Trading Strategy To Benefit From Weakness
To benefit from the expected weakness in the stock, an investor could buy put options. But, high prices on put options suggests an alternative trading strategy. The option premium is high because the expected volatility of the stock is high. Options that are based on selling an option can benefit from high volatility.
In this case, with a bearish outlook for the short term, a call option should be sold.
Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.
One strategy that is important to consider is the bear call spread. This trade uses two calls with the same expiration date but different exercise prices. Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call, so this strategy will always generate a credit when it is opened.
The risk profile of this trading strategy is summarized in the diagram below.
Source: The Options Industry Council
The trade has limited up side potential and limited risk. But, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade.
The maximum potential gain with this strategy is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received.
A Bear Call Spread in EA
For EA, we have a number of options available. Short term options allow us to trade frequently and potentially expand our account size quickly. Short term trades also reduce risk to some degree since there is less time for a news event to surprise traders.
In this case, we could sell an August 17 $135 call for about $0.90 and buy an August 17 $138 call for about $0.50. This trade generates a credit of $0.40, which is the difference in the amount of premium for the call that is sold and the call.
Since each contract covers 100 shares, opening this position results in immediate income of $40. The credit received when the trade is opened, $40 in this case, is also the maximum potential profit on the trade.
The maximum risk on the trade is about $260. The risk is found by subtracting the difference in the strike prices ($300 or $3.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($40).
This trade offers a potential return of about 20% of the amount risked for a holding period that is about three weeks. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if EA is below $135 when the options expire, a likely event given the stock’s trend.
Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $260 for this trade in EA.
These are the type of strategies that are explained and used in our TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your income and wealth building goals, click here for details on Options Insider.