Just an idea, gang. Use it now. Use it elsewhere. Really, this is simply an effort to educate the folks who do something else for a living. Many of my home-gamer pals have indicated to me that they are not comfortable using or trading option. We’ll occasionally do stuff like this, until you are comfortable, my friends.
When You Don’t Have A Position
Who doesn’t love video games? Well, recently … investors, that’s who. I am going to assume that you’ve seen the action in Activision Blizzard (ATVI) since that firm beat expectations last week for both Earnings per share, and revenue. The stock is a mere 9% off of the pre-earnings high. How about Electronic Arts (EA)? That stock remains almost 7% below the highs of late October. The difference there is that EA did not even bother to beat projected revenue, and guided weakly into their third quarter…. aka the holiday season.
You’ve heard of Take-Two Interactive. Rock Star Games? 2K? These are their labels. The end products? Grand Theft Auto, Max Payne, Midnight Club and Red Dead just to name a few. We could get into the fundamentals of this corporation, but that is not what this is about. This is about the cold-hearted mercenary that lives inside each and every one of us fighting the good fight with two fists, and trying to turn a buck in a risk controlled environment.
But, Still Want To Play Ball
TTWO reports after today’s close. There are twenty analysts that follow the name. They are looking for EPS of $0.74 on revenue of $510 to $512 million. Guess what? We don’t give a rat’s tail. We just want the stock to react. So, if the stock were to react by 5% to 9% overnight, that would imply a stock move of somewhere between 5.25 to 9.45, or a move down to a range of 96 to 99, or up to 110 to 114. A little hopeful? I get it, but how do we manage the risk while exposing ourselves to the potential of an overnight move?
Bear Call Spread
If you don’t like the stock, you could lay out the 3.60 for a 105 put that expires this Friday evening, or….what if you could expose yourself to some benefit in the case of the stock moving lower, while minimizing the downside risk inherent in the trade. Sounds good, right kids. Let’s illustrate.
Going into the close:
TTWO November 10 105 Calls are quoted around 3.40
TTWO November 10 103 Calls are trading around 4.40
If one were to sell (write) the 103’s at 4.40, and purchase the 105’s at 3.40, that trader would:
1) Pocket a credit of $1.00 on the premiums paid.
2) Have to buy the stock at 103 if TTWO remained above that price.
3) Be able to buy the stock at 105 if if TTWO went even higher. In other words, the risk is limited to two bucks, but you already netted a dollar, so the risk is really just that single buck. The most you can profit or lose on this trade is a buck. The edge is that in this case, I suspect that the stock will go lower. The trade works similarly in the other direction if you feel differently.
This is not the strategy of a home run hitter, gang. This is a singles hitters’ trick that does not allow you to get your face ripped off while regularly producing some revenue. Use only when you think you have an edge.