Bullish on ATVI Stock
Activision Blizzard, Inc. (NASDAQ:ATVI) stock is the focus of the example of an options strategy I’m about to outline below.
If you are not familiar with the name, Activision Blizzard publishes and develops an array of gaming titles that can be played on a number of consoles, devices, and smartphones. The company has enjoyed great growth and success, alongside sound fundamentals that support ATVI stock’s past performance.
In order to keep my strategies systematic, I rely on chart patterns and technical indicators. This also helps keep my watch recommendations as objective as possible.
I always assume that the price is efficient and discounts all available information, but not as it is described in efficient market hypothesis (EMH). On the contrary, I do believe that past price movements and volume do affect future prices and that future prices are not random.
ATVI stock has been in a defined bull trend since March 2015. That year produced positive returns of 94% for the pick. Currently, 2016 has provided positive returns of 8.1% for the stock. The trend sees no signs of abating.
Chart courtesy of www.StockCharts.com
On March 13, 2015, ATVI stock generated a golden cross, which is a bullish signal. It is produced when the 50-day moving average crosses above the 200-day moving average. Traders use this signal to confirm a bull market is on the horizon.
In mid-April, the moving averages were on the verge of executing a death cross. If you aren’t familiar with this signal, it is the exact opposite of a golden cross, confirming a bear market instead. That signal was averted, confirming the continuation of the stock’s current trend and the likelihood of accelerating it.
To say the least, the current trend is very bullish.
In order to create a successful strategy, we need a price objective. Taking a closer look at the ATVI stock chart below, a pattern has emerged. The following pattern is a cup-and-handle formation. It signifies a bullish continuation of the current trend and will provide a price objective for interested investors.
Chart courtesy of www.StockCharts.com
The cup and handle continuation pattern was confirmed when it broke above resistance at $40.00. To obtain a price target, the depth of the cup is projected above the horizontal resistance level. Using $12.00 as the depth of the cup, we get a price objective of $52.00.
An Options Strategy for a Pick Like ATVI Stock
ATVI stock is trading at $41.55 per share with a price objective of $52.00. This represents a possible 25% return. If a 25% return does not whet your appetite, derivatives are an alternative to consider for a stock like Activision Blizzard.
Using a bull call spread would effectively capture our objective and minimize the initial outlay. This strategy involves simultaneously buying calls at one price and selling an equal amount of calls at a higher price. The only risk an investor has is the initial outlay used to put the trade on.
- Buying one January 20, 2017 $45.00 call contract for $2.19
- Selling one January 20, 2017 $49.00 call for $1.05
The net outlay is $1.14 per contract, which defines the risk of this strategy. At expiration, if the stock’s shares are trading above $49.00, the net value of the trade will be $4.00—a profit of 250.8%, excluding fees.
The Bottom Line on ATVI Stock
From a purely technical perspective, shares of ATVI stock provide an excellent opportunity to participate in a stock that is embedded in a bull trend. We can only speculate on the future price from the tools we have available, but managing risk is of the most importance.
If I am correct on my assessment and price objectives, the possible returns for a pick like ATVI stock could range from 25% to nearly 251%.