This Stock’s Pullback Has Created a New Window of Entry

Is it 2016, or 1996?

If I didn’t know any better, I’d say it was the latter: Independence Day is hitting theaters, a Clinton is running for president, and adults are scouring the earth in search of Pokmon.

If you’re unfamiliar – Nintendo Ltd. Co. (NTDOY) has just launched the augmented reality game Pokemon Go, wherein players search for fantastical creatures, “train” them, and battle against each another.

The original game was released 20 years ago when the millennial generation was in elementary or middle school.

This newest edition has been downloaded from the Apple Store by an estimated 15 million users in just over a week, according to research firm Sensor Tower.

Sensor Tower also estimates that the game is pulling in about $1.6 million a day – on iOS devices alone.

Now, to be fair, I don’t, personally, play too many video games. But I do work in the financial markets.

And along with the rest of the world, I’ve watched Nintendo’s seemingly dead tech stock bounce more than 50% in a matter of days.

Unfortunately, most investors have already missed out on Nintendo’s big move, which required the foresight that a single mobile-only app game would take the gaming world like it has.

But, don’t worry. There’s still plenty of growth for video game stocks.

And one such opportunity is coming over the horizon now…

The Art of War
The video game industry is one of the biggest and most lucrative businesses in the world.

According to research firm Newzoo, the industry was valued at nearly $92 billion in 2015.

Electronic Arts Inc. (EA) is one of America’s largest and most profitable video game companies with some of the biggest releases in the market.

Yes, Nintendo scored a hit with Pokemon Go.

But Electronic Arts has laid waste to Nintendo shares for the better part of the last two decades.

In the last five years alone, the company has soared 227% – outperforming the Nasdaq Composite by nearly three times.

And in that time frame, EA has grown earnings by a substantial 29%, thanks to its diverse portfolio of games.

As you may know, EA’s is home to hugely successful games like FIFA, Madden NFL, Battlefield, and Titanfall.

Now, I know to some of you, these game titles mean nothing. But these brands contributed to $4.5 billion in revenue for EA last year alone.

But it’s the company’s Star Wars: Battlefront franchise that helped drive the company to a monster-earnings beat last quarter.

As of March 31, EA reported that it has sold 14 million copies of the game, which was released last November.

And with another potential smash-hit Star Wars movie coming out this winter with another game tie-in, things could get even hotter for EA.

But let’s talk about why you might want to look at Electronic Arts right now.

A Small, Cheap Play on a Big Fish
For starters, its shares have just broken out of an ascending triangle chart pattern to a fresh 52-week high.

Triangle breakouts to the upside attract new money from off the sidelines, because the breakout demonstrates the bulls have gathered the resources to overcome resistance.

And because stocks trading at new highs are a beacon of strong momentum, investors often pile into shares hoping to ride the wave even higher.

These are two of the most bullish trading signals out there.

And, now that shares have pulled back slightly, a new window of entry has just opened up.

You see, over the last ten years, EA shares have tended to dip in July.

But since 2006, they’ve averaged a gain of 3.61% during the month of August – the stock’s second best monthly performance of the year.

To capture this potential gain, investors could simply buy shares now.

A strategic option play, however, could lower your cost basis, as well as net you a much higher profit on just a few dollars of movement on the stock.

For example, I like the EA September 2016 $80 calls, currently trading around $2.65 a share. The September expiry provides plenty of time to catch the August wave.

One hundred shares of Electronic Arts costs about $7,725 at its current price.

Yet, just one of these calls – worth 100 shares – costs just $265 before commissions.

That’s a 96% discount to owning the shares outright!

The options could be worth double their present value in August with a move above $82 in the underlying shares.

The likelihood that Nintendo’s stock will double in that timeframe is very small.

And best of all, your total risk on the calls is limited to the amount paid for them – potentially much less than buying EA stock outright.

Bottom line: Nintendo is a crowded trade right now. But an options play on Electronic Arts captures capital flooding into gaming stocks, lowers your cost basis, and increases your profit potential.

Now that’s a trade to catch!

On the hunt,

Jonathan Rodriguez

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Source: Wall Street Daily