Video-game developer and distributor Electronic Arts ERTS followed the rest of the market lower on Tuesday, dipping 3.6% to approach a six-month low by the closing bell. In the past year, the stock has underperformed the broader market indices, giving back about 14%.
Some investors may be viewing the stock's latest pullback as a buying opportunity, but have adjusted the length of their bullish time frame. Mid-morning activity on Tuesday suggests investors sold out of existing January-dated call options and opened new calls in the March series.
About 10:30 a.m. Eastern Time, a block of 75,000 January 20 calls traded for seven cents per contract. It appears as though these calls were existing open positions that were sold to close. Volume at this strike heading into the session was just over 90,000 contracts.
At the same time these calls hit the tape, more than 38,000 calls traded at the March 20 strike. These were evidently bought to open for 25 cents apiece.
The investor seems to have sold out of the shorter-term positions, escaping with $525,000 in premium and turning around to spend $950,000 on the later-dated calls. He kept the same strike (20), suggesting his bullish outlook remains but the time frame has been lengthened, giving the stock a bit more time to move. The March call is out-of-the-money by $5.15, or almost 35%, and currently has a delta of 13. This small delta also defines the chance of this call finishing in the money, so this is a low probability trade.
Assuming no further rolls in the position, the March 20 call has 100% of the premium paid at risk (25 cents per contract). If ERTS is able to rally through the breakeven mark of $20.25 by March expiration in 116 days, gains are theoretically unlimited to the upside. Between now and then, potential gains (and losses) are determined by the delta of the call, which is driven by a number of factors including stock price, implied volatility, and time until expiration.
The profit & loss graph below illustrates what this long call would look like at expiration. Note that losses level out below the 20 strike while gains slope higher from this point.
Photo Credit: popculturegeek.com
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