Call Options Or Put Options On Electronic Arts (EA)?
Electronic Arts (EA) develops game software content and services for video game consoles, PCs, mobile phones, and others. EA has been around for a long time and has developed and published many popular games over the years. Currently, the company is the second largest video game developer in the US.
EA is currently trading for $20.03 per share and has risen over 30% year to date. The shares are up 86% from the 52-week low of $10.77, and they’re already 3% higher than the previous 52-week high of $19.51.
Is this an opportunity to buy call options on EA after the company’s earnings impressed to the upside? Or should you buy put options on EA because of the company’s recent history of poor performance?
The bulls make a convincing argument…
EA is estimating fiscal 2014 profit of $1.20 per share. That’s ahead of the average estimate of $1.10 per share. Plus, digital revenue rose 45% year over year to $618 million. That’s a huge deal for an industry that’s well on its way to become entirely digital.
The surprisingly good numbers were a result of aggressive cost cutting and the increase of higher-margin digital sales.
What’s more, EA just announced a huge deal with Disney (DIS) to be the exclusive provider of Star Wars games. The Star Wars franchise is clearly an enormous one, and could be a huge revenue source for EA.
But the bears have a compelling case as well…
EA is nowhere near the company it used to be. Before the financial crisis in 2008, the stock traded over $50 per share. But, the industry has changed dramatically since then.
These days, video game players are more likely to buy a $0.99 app for their iPhone rather than a $60 console or PC game. Margins may be higher with apps, but revenues and total profits are way down from the prime period.
Moreover, EA is coming off its second straight year of being voted “Worst Company in America” by Consumerist readers. The consumer affairs website gives multiple reasons why EA is so disliked, including poor products and lack of support.
So, is EA’s strong quarter enough to overcome a long period of poor performance?
If you think the bulls are right, take a look at buying the EA June $20.00 calls for around $1.25.
If you think the bears are right, take a look at buying the EA June $21.00 puts for around $1.20.
Yours in Profit,
Gordon Lewis
Category: Call Or Put Options?
