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Many investors have lost faith in Activision (NASDAQ: ATVI ) and Electronic Arts (NASDAQ: EA ), but there's a battle going on within the price charts of both EA and ATVI. As always, this strategist sees an opportunity.
Specifically, shares of gaming stocks Activision and EA appear ripe for a pair of well-placed vertical spreads to capture major upside.
While both stocks are positioned for massive secular growth from burgeoning markets, such as esports and mobile, ATVI and EA are each off about 15% and 16%, respectively, since peaking in mid-July. The reason behind this is Epic Games and its weak guidance.
Epic, a privately held company behind Fortnite , has created huge mainstream buzz by opening up the gaming market's notoriously younger male user base to new demographic groups. But the massive popularity has also put shares of EA and ATVI under pressure.
Wall Street fears the short-term impact on earnings and sales, dismissing the possibility of management at Electronic Arts and Activision sandbagging their forecasts.
I don't claim to have the inside scoop as to how this will play out … but considering investors' bearish behavior of late, the squiggly price lines of EA stock and ATVI stock are shaping up as solid corrective pullback candidates.
Gaming Stock to Buy #1: EA Stock
EA stock has been a steady climber the past few years and there's little evidence to counter that trend. Now and with shares having corrected over the last several weeks, EA stock is well-positioned to move higher.
Technical support layered in items like the 200-day simple moving average, prior highs, the 50% retracement level, a couple trendlines and an oversold stochastics condition point to a 'game on' situation for EA stock bulls.
EA Stock Options Strategy
I like approaching EA stock with a slightly out-of-the-money bull call spread. One favored combination is the Nov $135/$145 call vertical. With shares of EA at $126.75 the spread is priced for $2.70.
On the one hand, a call vertical reduces and defines the trader's risk. It also doesn't open up the trader to additional downside exposure beyond the roughly 2% paid to enter the spread. That could come in handy if technically things don't go as planned in EA stock.
On the other hand, if EA begins to reassert its current uptrend, a rally of 14% through $145 can capture as much as $7.30 for a return of 270%. And with earnings in late October, this strategist is optimistic the fall will be a profitable time of year to go bear hunting in EA stock.
Gaming Stock to Buy #1: ATVI Stock
Similar to Electronic Arts, ATVI stock remains in an uptrend despite its correction the past several weeks. The correction has also provided similar pain with shares having dropped about 15% versus EA's 16%.
Also, testing of a significant trendline and prior base for support, as well as an oversold stochastics reading point to a decent spot on the price chart to get long EA stock.
ATVI Stock Options Strategy
Reviewing ATVI's options, the Nov $72.50/$80 call spread is favored. With shares at $69.66 the spread is priced for $2.00. Above $80, this trader can net $5.50 at expiration.
This puts the position inside the next earnings cycle in late October. Again, this offers investors a way to play with no additional risk to the position in the event ATVI collapses.
Investment accounts under Christopher Tyler's management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler's observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual.For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits .
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