Editor’s note: We would like to welcome Park Research LLC @ParkResearch to the CBOE Options Hub family with their look at EA earnings in front of their report after the close today.
Electronic Arts will have their earnings released after Thursday’s closing. While we tend to think of an earnings release as a binary event – and more than not it is – we can also use the historical information to assess how investors and traders tend to react to the news.
Let’s take a look at some information. As of Wednesday (July 29), $EA closed at 72.18. Naturally, we looked at the 72 straddle. The options were marked at $4.90 or 7.11% move – this move is calculated from 72.18 to break-even to the downside of 67.05. As you can see below, that straddle move is described as the light blue filled area. Each candlestick is from each earnings move with 1 being the most recent to 20 being prior 20Q earnings move (i.e. 5 years ago).
Out of the last 20 earnings, at least 11 of them had moved greater than the above straddle price some time during the day, but more importantly, 15 of them closed higher than the previous close and 17 of them were trading higher some time during the day. On average, its absolute max move for 20Q was 9.68%, its absolute gap open move was 5.06%, and its absolute closing move was 7.36%. On average, its max move is 10.99% and its close is 8.49% when the stock closed higher than the previous close. In this case, we want to take a look at a synthetic long, selling $68.00 puts and buying $77.00 calls with $0.06 credit. The breakeven area is $67.94 (ex. Commission); slightly above the lowest close area of $67.71 or -6.195%. However, on average, we expect the stock to be around $77.49 (using the average of absolute closing of 7.36%) well above $76.94 breakeven area or possibly to $80.11 (using the average of up closing of 10.99%).
Will history repeat itself? We can’t be sure, but it seems the potential max risk is $0.23 while the potential reward is from $0.55 to $3.17. In the end, if you want to make money, you have to play the game…. And, as they say, “EA Sports, It’s In the Game”.