At the end of November we took a look at video game maker Electronic Arts (EA) when the stock was 106.50. We were looking at themes in media M&A with the thought that game makers could start to hear some chatter. We detailed a trade idea that starts mildly bullish with a target in January of a slight move higher towards 110, but then positioning for a larger move into March above that level. Today the stock is near 110 so I wanted to check in on the trade idea. Here it was, from November 29th:
TRADE IDEA: EA ($106.50) BUY JAN / MARCH 110 CALL CALENDAR FOR $3
-Sell to open 1 Jan 110 call at $2.75
-Buy to open 1 March 110 call for $5.75
With the stock 109.90 this is working as intended, worth about 3.75 and positioned well. The Jan 100 short calls are worth 2.25 (a gain of .50) and the March 110 calls are worth 6.00 (a gain of .25) In other words, the sale of the Jan calls helped with the decay over the holidays. Had this just been an outright call buy in March the gains would be small, despite the stock going in the direction we wanted. But now with the stock near strike we need a game plan for the next few weeks because of the short 110 calls this month.
Right now those are obviously entirely extrinsic value, if the stock closed at this level on January expiration those would be worth zero and the entire trade would be significantly more profitable. We’re rooting for no move in the short term. We targeted 110 with the calendar strikes because that is near term resistance on a move higher:
The stock has made a run at this level twice in the past two months and backed off. So what happens next is key to trade management. If the stock stops here again the trade is in very good shape as long as the pullback isn’t severe. And on the flipside if the stock gets through this level we need to be careful that it doesn’t run too high too fast as the trade becomes short deltas above 110. Therefore if the stock hangs out near 110 over the short term patience will be rewarded as the trade idea will have nice gains with the stock doing nothing. If the stock pulls back a little it also makes sense to be patient. However, if the stock gets above 110 a short leash and a stop to roll above 111-112ish is the right move, taking existing profits to close the Jan 110 call and rolling it up and out to Feb or March and the 115 or 120 strike.