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Options Combo-Play Sees Multi-Year Highs Ahead For Electronic Arts

Posted on the 15 July 2011 by Phil's Stock World @philstockworld

ERTS - Electronic Arts, Inc. – Shares in the video game developer may rally to their highest in more than two years by January 2013 expiration according to three-legged bullish plays initiated in Electronic Arts options this morning. Earlier this week the company announced an agreement to acquire PopCap Games, which makes games for mobile phones, tablets, PCs and social networking sites, in a cash and stock deal valued at up to $1.3 billion. Shares in Electronic Arts are currently up 0.50% to arrive at $23.63 as of 11:30 am ET. Long-term bullish investors eyeing fresh multi-year highs by Jan. 2013 expiration appear to have sold put options on the stock in order to partially offset the cost of debit call spreads. Traders sold around 5,000 puts at the Jan. 2013 $17.5 strike at an average premium of $1.42 each, purchased around the same number of calls up at the Jan. 2013 $25 strike for an average premium of $3.67 per contract, and sold some 5,000 calls at the Jan. 2013 $30 strike at an average premium of $1.97 a-pop. Average net premium paid to initiate the three-way trade amounts to just $0.28 per contract. Investors employing the strategy profit if shares in Electronic Arts rally 7.0% to exceed the average breakeven price of $25.28 by expiration day in more than one year. Maximum potential profits of $4.72 per contract are available on the spread in the event that shares in the interactive entertainment provider jump 27.0% to trade above $30.00 at expiration in January 2013. The company’s first-quarter earnings report is expected to hit the stands after the final bell on August 2.

SNE - Sony Corp. – Call activity on the designer and manufacturer of electronic equipment and devices suggests some strategists are positioning for shares in the Tokyo, Japan-based company to rally substantially by October expiration. Sony’s shares suffered following the March 11 earthquake and tsunami in its home country. A number of recent, well-publicized hack attacks served as a kick to Sony’s ribs while it was already down. The stock had started to trend lower in the two weeks before the earthquake struck, with shares ultimately losing roughly 35.0% of their value, sliding from a 52-week high of $36.97 on February 28, to as low as $24.21 on June 20. Sony’s shares, which today increased 1.95% today to touch an intraday high of $27.25, are currently 12.6% off their June 20 52-week low. Investors expecting the recovery to continue purchased around 5,000 calls at the October $29 strike for an average premium of $0.75 per contract. Call buyers profit if shares in Sony Corp. surge 9.2% over today’s high of $27.25 to surpass the average breakeven price of $29.75 by October expiration day. Sony’s new tablet computers, which will run on Google’s Android operating system, are expected to debut this fall. October contract calls on SNE may rise in value if the tablets prove popular with consumers currently shopping around in an iPad-dominated market. The value of the calls will also likely shift one direction or the other following Sony’s first-quarter earnings report on July 28.

EAT - Brinker International, Inc. – The owner and operator of casual dining restaurant brands Chili’s Grill & Bar and Maggiano’s Little Italy attracted the attention of at least one bearish options trader this morning. It looks like one or more investors are scooping up put options on Brinker International ahead of the company’s fourth-quarter earnings report on August 11. EAT’s shares are off their lows of the session, trading 0.35% lower on the day at $25.40 as of 11:50 am in New York. Brinker’s shares gained 92.0% between July 1, 2010, and July 11, 2011, when shares touched a new 3-year high of $26.80. Put buyers may be building up downside protection to hedge positions in the underlying, or could be establishing outright bearish positions on the expectation shares are due for a correction. Traders exchanged 2,000 puts at the August $25 strike against previously existing open interest of just 80 contracts. It looks like nearly all of the contracts were purchased for a premium of $1.03 each. Put buyers profit if shares in the restaurant operator decline 5.6% to breach the effective breakeven price of $23.97 at expiration next month.

ETR - Entergy Corp. – The energy company engaged primarily in electric power production and distribution popped up on our ‘hot by options volume’ scanner after sizable prints in long-dated call options cropped up in the January 2013 contract. Shares in Entergy are down 0.55% in early-afternoon trade to stand at $67.12 by 1:05 pm ET. The company reports second-quarter earnings in less than three weeks. One investor appears to have initiated a debit call spread, buying 2,500 deep in-the-money calls at the Jan. 2013 $65 strike for a premium of $5.80 each, and selling the same number of calls at the Jan. 2013 $75 strike at a premium of $2.00 apiece. Net premium paid to establish the spread amounts to $3.80 per contract, thus positioning the trader to profit in the event that Entergy’s shares increase 2.5% in to surpass the effective breakeven price of $68.80 by expiration day. Maximum potential profits of $6.20 per contract pad the investor’s wallet if the price of the underlying jumps 11.7% in the next year and half to exceed $75.00 at expiration in January 2013. Shares in Entergy Corp. last traded above $75.00 back in November 2010.

 

Andrew Wilkinson
Senior Market Analyst
ibanalyst@interactivebrokers.com

Caitlin Duffy
Equity Options Analyst

 

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