How Long Will Electronic Arts Be Range Bound?

Gaming software developer Electronic Arts Inc. (NASDAQ:EA – 13.07) was targeted for an anti-volatility play in the options arena yesterday, with one speculator writing both calls and puts to bet on a near-term trading range for the stock.

Specifically, symmetrical blocks of 8,153 contracts changed hands at the November 13 put and the November 14 call. Both of these contracts were marked “spread” and crossed at or below the bid price, pointing to seller-driven activity. The puts traded at a volume-weighted average price (VWAP) of $0.80, while the calls traded at a VWAP of $0.55. Plus, open interest skyrocketed by roughly 10,000 at each strike overnight, suggesting that a short strangle was established on EA for a net credit of $1.35 per pair of contracts.

The best-case scenario for this strategy is for EA to finish between the $13 and $14 levels when November-dated options expire, rendering the contracts worthless and allowing the trader to retain the entire net credit. Furthermore, the play can still be profitable as long as EA stays within the bounds of $11.65 (put strike minus net credit) and $15.35 (call strike plus net credit). However, should EA perforate either of these breakeven rails within the options’ lifetime, losses will begin to accumulate.

On the charts, there could be reason to believe that EA could be range-bound over the next two months. The equity has ripped back some 38% in 2012, slipping to a 13-year low of $10.77 on July 31. But since then, the shares have been trading between support in the $12.50-$13 region and resistance around $14.50. The security could also find an additional layer of resistance from its descending 40-week moving average, which is now hanging out in the $15 area.

Recent EA options activity on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) reflects an overall bullish disposition, as the equity sports a 10-day call/put volume ratio of 10.83. In other words, options traders have bought almost 11 calls for every put during the past couple of weeks. This ratio ranks in the 85th percentile of its annual range, pointing to a healthier-than-usual appetite for bullish bets over bearish.

However, this call-heavy activity could signal an ulterior motive. Short interest swelled by 61% over the past two reporting periods, and now accounts for a healthy 5.4% of the EA’s float. As such, bears could be buying calls to hedge their newly shorted shares, rather than betting bullishly on the stock’s near-term price action.

Against this backdrop, though, demand for EA’s short-term options has been waning. In fact, the stock’s Schaeffer’s Volatility Index (SVI) now stands at 39%, which registers in the 21st percentile of its annual range — meaning near-term options are relatively cheap at the moment. As such, now might not have been the most ideal time to sell options premium on the equity.

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Article source: http://www.schaeffersresearch.com/marketcenters/optionscenter/content/how+long+will+electronic+arts+be+range+bound/default.aspx?ID=113002

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