Electronic Arts Inc. (NASDAQ: ERTS) shares are trading higher today on a bunch of varied news items. First, the company announced a launch date for is popular "Rock Band" game for the Nintendo Wii. Second, the stock was added to Goldman Sachs Conviction Buy list. Lastly, the company's Chief Financial Officer Warren Jenson will resign at the end of the month. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on ERTS.
After hitting a one-year high of $61.62 in October, the stock hit a one-year low of $43.62 in February. ERTS opened this morning at $50.33. So far today the stock has hit a low of $50.00 and a high of $51.08. As of 12:30, ERTS is trading at $50.31, up $0.62 (1.3%). The chart for ERTS looks neutral and improving, while S&P gives the stock a negative 2 STARS (out of 5) sell rating.
For a bullish hedged play on this stock, I would consider a May bull-put credit spread below the $40 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 5.3% return in just two months as long as ERTS is above $40 at May expiration. Electronic Arts would have to fall by more than 20% before we would start to lose money.
ERTS hasn't been below $43 at all in the past year and has shown support around $46 recently. This trade could be risky if the company's earnings (due out in early May) disappoint, but even if that happens, this position could be protected by the support the stock might find around $45, where it bottomed out twice in the past two months.
Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in ERTS.
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Reader Comments (Page 1 of 1)
3-26-2008 @ 3:08AM
Joyce L Williams said...
added with the impetus of ingenuity on the lateral change over the most recent volatile rally , it was not even shocking that the Dow had its attitude of
being hit by its everstanding effect on the NASDAQ and S&P by hitting us with a drive so strong over the last week that caused a flurry of market drives that swarmed the stock market. of course, as solid picks affect the market, i am predicting that the Dow will have a strong marginal effect in the course of two weeks if brokers and traders shift their technical analysis to looking at the broader analysis of the market by testing the volatile market EPS against the current market price per share and hedge against the current market