ERTS iron condor candidate

While looking for covered call posibilities over the weekend, I ran across ERTS -- the game maker Electronic Arts. I rejected it for a covered call -- there's no uptrend -- but it would make a reasonable iron condor.



ERTS gapped down on Jan. 12, from a prior-day close of 18.87, to open at 16.74 after the company cut its earnings guidance to more than 40 percent below analysts' estimates and has traded in a narrow range the subsequent four days.

Since Nov. 1 the stock has traded between 18.50 and 15.86. At this posintg it is trading at 17.15.

The new earnings guidance, in my opinion, has soaked both the bad news and the good news out of the market for this stock. It is unlikely to make any large moves in the next 30 days.

That scenario is perfect for an iron condor, which is profitable so as long as the underlying stock's price remains within the iron condor's range of profitability.

An iron condor is a bull put spread and a bear call spread on the same stock, each having the same expiration date.

For ERTS, I would structure it using February options.

For the bear call spread, defining the upper limit of profitability, I would sell the 18 strike and buy the 19 strike. For the bull put spread, I would sell 16 and buy the 15.

That gives me a range of maximum profit if the stock remains between 16 and 18, with break-even points of about 15.55 and 18.45. On the chart, resistance is at 17.72 on the upside, and support at 16.60 on the downside.

At this point it would provide a 45-cent credit, which defines the profit.

A blog post on ERTS:

• Seeking Alpha thinks it's a possible covered call
  

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Topics:
Electronic Arts games