Activision Blizzard (ATVI) will report their Q1 earnings today after the close. The options market is implying about a 6.5% one day move tomorrow, about in line with the average one day move over the last four quarters. Watch my short preview from last night on CNBC’s Fast Money program:
As far as that implied move is concerned, with the stock near $49.50, the May 3rd weekly 49.50 straddle (the call premium + the put premium) is offered at about $3.30, if you bought that and thus the implied movement between now and tomorrow’s close you would need a rally above $52.80 or a decline below $46.20 to make money. or about 6.6% in either direction.
Despite ATVI’s 25% rally from its 52-week lows made in February, the stock is up a little less than 7% on the year, massively underperforming the broad market, and still down about 33% from its all-time highs made on October 1st. The one-year chart below shows the stock’s attempt to break out of its 2019 purgatory:
Back in February I wrote a post detailing the many headwinds that had caused the stock to be cut in half in the prior few five months (read here), while many of these are fairly well known, and I think it is safe to say are “IN” the stock at current levels, what is not known is the company’s ability to outperform already lowered estimates, or whether or not there is another cut to outlook when they report in a few hours.
So what’s the trade?
If I were inclined to play for a breakout above $50 I might consider the following defined risk strategy:
Bullish Trade Idea; ATVI ($49.40) Buy Aug 50 – 65 call spread for $3.50
-Buy to open 1 Aug 50 call for $4
-Sell to open 1 Aug 65 call at 50 cents
Break-even on August expiration:
Profits of up to 11.50 between 53.50 and 65 with max gain of 11.50 above 65
Losses of up to 3.50 between 50 and 53.50 with the max loss of 3.50 below 50
Rationale: this trade idea risks 7% of the stock price (basically the implied one day move tomorrow) but offers three and a half months for that break-even to occur. This trade offers a 3 to 1 potential payout vs the premium that is at risk.
If I were inclined to play for another miss and guide lower I would target $40 in the fairly near term.
Bearish Trade Idea: ATVI ($49.50) Buy June 47.50 – 40 put spread for $1.50
-Buy to open 1 June 47.50 put for $1.90
-Sell to open 1 June 40 put at 40 cents
Break-even on June expiration:
Profits of up to 6 between 46 and 40 with max gain of 4 at 40 or lower
Losses of up to 1.50 between 46 and 47.50 with the max loss of 1.50 at 47.50 or higher.
Rationale: this trade idea breaks-even a good distance away from the current price, but is playing for a greater than expected move post earnings after the stock has rallied hard over the last couple months into today’s earnings. $40 on the downside seems like an area where the stock would find some technical support. The use of June is by design as a miss and guide lower would clearly cause a sharp move lower, but ultimately the cheaper the stock gets, and the closer they get to be able to beat lowered expectations could be the sooner they are considered as a take-over candidate or just a cheap play on digital content.