Call Options Or Put Options On King Digital Entertainment (KING)?

| August 13, 2014 | 0 Comments

Candy Crush SagaIt’s been a rough day so far for King Digital Entertainment (KING). The mobile game company is down 23% on a big earnings miss.

KING shares are currently trading at $14.02. The stock is trading 40% below the 52-week high of $23.48 and is now 8% below the previous 52-week low of $15.26.

Is this an opportunity to buy call options on KING because the stock is oversold? Or should you buy put options on KING because the company’s earnings results were much worse than expected?

The bulls make a convincing argument…

Despite the bad news from the quarter, there’s still a lot to like about KING. The company’s “Candy Crush Saga” is still one of the most widely played games of all time.

What’s more, KING met Wall Street expectations when it came to profits. Its adjusted profit per share of 59 cents is quite robust. Plus, KING announced a special dividend of 46.9 cents per share.

Finally, after the plunge, KING is trading at just 4.2x earnings. That’s very inexpensive for a company that just announced such a hefty dividend.

But the bears have a compelling case as well…

On the other hand, KING’s earnings were truly abysmal. The number of people playing Candy Crush dropped substantially, players of other KING games didn’t increase as much as hoped, and paying players dropped overall.

Moreover, revenues missed by 3%, with a 16% decline in Candy Crush revenue compared to the first quarter. Even worse, the company lowered its outlook for the second half of the year.

Not to mention, there isn’t a clear reason for the drop. Is it a one-time thing or the start of a trend? It’s hard to invest in a company when its future is murky.

So is it time to be bullish on KING due to overselling, or should you take a bearish position because the company looks like it’s in big trouble?

If you think the bulls are right, take a look at buying the KING September 20th 14 calls for around $1.00.

If you think the bears are right, take a look at buying the KING September 20th 14 puts for around $1.00.

Yours in Profit,

Gordon Lewis

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Category: Call Or Put Options?

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also editor of our dynamic theme-based options trading service, Advanced Options Adviser, and one of the key analysts behind the highly successful Options Trading Wire.