Video Game Sales Could Move Stocks
Many of us know video games can be addicting. We might know that from first hand experience sitting in front of a monitor or we may simply know someone who became very involved in a game. As traders, we know that those games can be a big business.
One example of the business of video games is Activision Blizzard, Inc. (Nasdaq: ATVI). Activision Blizzard is a developer and publisher of interactive entertainment content and services.
The company develops and distributes content and services across various gaming platforms, including video game consoles, personal computers (PC) and mobile devices.
Founded in 1979 as the first independent video game software developer and distributor, the company launched a series of multi-million unit selling titles in the early 1980’s for the Atari 2600 including Pitfall, Kaboom! and River Raid. And since then, the company has continued to deliver popular games.
Popular games in the current roster of products include Call of Duty, Destiny 2 and Crash Bandicoot.
Over the past twelve months, sales of games and other products topped $6.9 billion. Strong sales and earnings have made the stock a long term winner, gaining more than 3,100% since 2004.
Recent price action shows that the stock remains a top performer but the move to the up side has slowed.
Now, the stock could fall into a trading range that could last until earnings are released. The company has scheduled its fourth quarter earnings announcement for February 8. Over the past 15 years, the stock has shown a tendency to drift in a narrow range while awaiting these results.
Seasonal trends like that can be useful for traders to consider. News, like earnings announcements, tends to be scheduled near the same time of the year in successive years. This results in patterns and those seasonal patterns can tell traders what to expect.
Seasonal trends are simply tendencies and should never be the sole reason for taking a trade. In this case, the chart pattern aligns well with the seasonal pattern.
ATVI has rallied sharply in the past few weeks and is now overbought. An overbought stock is likely to pull back or at least consolidate its gains for some period of time. For ATVI, the chart pattern suggests a consolidation is likely, the same conclusion reached with an analysis of the seasonal pattern.
It’s possible the consolidation will last until the earnings report. After that, the stock could make a significant price move. But, until then traders are likely to look for other opportunities as they wait for news from the company.
A Strategy to Benefit While Waiting for More Details
As we wait for clarity on the impact of these various factors, we could see stocks settle into a trading range. One best option strategy that benefits from a stock in a trading range is an iron condor. This strategy has the added benefit of carrying limited risk.
To open an iron condor trade, the investor sells one call while buying another call with a higher exercise price and sells one put while buying another put with a lower exercise price. Typically, the exercise prices of the calls are above the market price of the stock and the exercise prices of the put options are below the current price of the underlying stock.
In an iron condor, the difference between the exercise prices of the two call options will be equal to the difference between the exercise prices of the two put options. The final requirement for this strategy is that all of the options must have the same expiration date.
The risks and potential rewards of the strategy are shown in the following diagram.
Source: The Options Industry Council
The maximum gain on this trade is equal to the premiums received when the position is open. The maximum risk is equal to the difference in the two exercise prices less the amount of the premium received when the trade was opened.
Opening an Iron Condor in Activision Blizzard
For ATVI, the trade can be opened using the following four options contracts:
As you see, all of the options expire on the same day, Friday, February 9.
The difference in the exercise prices of the calls or puts is equal to $2.00. Since each contract covers 100 shares of stock, this means the maximum risk on the trade is equal to $200 less the premium received when the trade was opened.
Selling the options will generate $2.30 in income ($0.95 from the call and $1.35 from the put). Buying the options will cost $2.10 ($1.30 for the call and $0.80 for the put). This means opening the trade will result in a credit of $0.20, or $20 for each contract since each contract covers 100 shares.
The maximum risk on the trade is equal to the difference in strike prices ($2.00) minus the premium received ($0.20). This is equal to $1.80, or $180 since each contract covers 100 shares. Many brokers will require a margin deposit equal to the amount of risk. That means this trade may require just $180 in capital.
The maximum gain on the trade is the amount of premium received when the trade is opened. In this case, that is $0.20 or $20 per contract.
The potential reward on the trade ($20) is about 11% of the amount risked, a high potential return on investment for a trade that will be open for about one week. If a trade like this is entered every week, a small trader could quickly increase the amount of capital in their trading account.
This trade could also be closed out early, ahead of the earnings report, to reduce the potential risks of the trade. It could still deliver its maximum gain even if the position is closed before the expiration date of the options.
The iron condor is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that should be lower than owning the stock.
These are the type of trading strategies that are explained and used in stock trading tips Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.