Hey Traders,
Gaming stocks have been a stand-out topic for much of 2021 – from GameStop’s (Ticker: GME) meteoric meme stock rise, to Netflix’s (Ticker: NFLX) recent announcement that it intends to add mobile gaming as part of its streaming service.
As lockdowns ease, you might expect this hot sector to cool … and it has, but only slightly, with the recent slowdown expected to only be temporary.
After all, there’s only so much sunshine and socializing to be had before many of us feel like retreating back into the comfortable embrace of our own living room again … right?
However, even with recent upbeat video game sales data, and expectations for future growth in the sector, not everyone seems to be hopping on the gaming bandwagon … hedge funds have been shedding their holdings of Communication Services Select Sector SPDR Fund (Ticker: XLC) at a notably rapid clip. XLC holds a variety of communication and gaming stocks, and video game all-star Activision Blizzard (Ticker: ATVI) is the fund’s tenth largest holdings.
Now, heavy hedge fund selling doesn’t necessarily indicate anything about the state of the sector … but it could. We’ll talk all about how hedge funds often get the jump on trading trends ahead of the general public, and how you can actually trade like this yourself on Thursday, July 29, at 8:00 p.m. EST. You can register here.
In the meantime, let’s take a closer look at these 4 gaming stocks to see if we can make sense of the trends.
As I said, the popularity of video games is really showing no signs of slowing, in spite of loosening COVID restrictions.
June video game sales were up 5% year-over-year, and gaming hardware sales were up a whopping 112% year-over-year!
And while Gen Z cites gaming as its preferred pastime (over listening to music, surfing the internet, and even watching television!), it isn’t just the young guns getting in on the fun:
U.S. video game audiences in 2020, by age group. Image courtesy of Statista
And maybe it’s inter-generational love of gaming that’s inspiring this streaming stock to add to its arsenal …
Netflix (Ticker: NFLX)
Netflix recently announced its intention to add mobile gaming as a part of its subscription package, as an attempt to boost the disappointing user-growth the streaming giant projected at its most recent earnings call.
NFLX plans to develop games in-house, though licensing deals with established gaming companies may also be in the works.
Unsurprisingly, NFLX was one of the biggest pandemic gainers (remember Tiger King?), but it’s recent subscriber growth drop-off has weighed on the shares, currently sitting at $515 after hitting $593 earlier this year.
NFLX is now planted under its 200-day moving average, which an area of recent resistance. However, the important round-number $500 level has not yet been breached, and NFLX’s 50-day moving average may also act as support from the shares’ post-earnings sell-off.
Chart courtesy StockCharts
In the option pits, even though put option open interest is at an annual high, NFLX’s put/call volume ratio of 0.66 is relatively middle-of-the-road, suggesting trader sentiment may not actually be much more put-skewed than usual.
However, NFLX options are about as cheap as you’re going to find them, with NFLX 30-day at-the-money implied volatility (ATM IV) hitting an annual low on Friday, indicating options traders are pricing in exceptionally low volatility expectations.
If you’re going to make a move on Netflix, now may be the time to act, with the shares still wallowing near their post-earnings low, and options on sale.
Activision Blizzard (Ticker: ATVI)
Activision Blizzard was another name that thrived during the pandemic lockdowns, with the shares rocketing higher during the first half of 2020 and — after a brief breather — resuming their journey higher into 2021:
Chart courtesy StockCharts
Recently, though, ATVI seems to have run out of steam, and a new lawsuit over toxic workplace culture certainly isn’t doing the video game maker any favors.
Headed into earnings on August 3, ATVI is expected to report a year-over-year earnings per share decline of over 20% — which could explain why traders in ATVI’s pits are more put-skewed than usual. ATVI’s put/call volume ratio is currently in the 72nd percentile of its annual range, with put open interest in the 94th percentile.
It seems like options traders are pricing in a slightly larger-than-average post earnings move, judging by ATVI’s post-earnings straddle indicator. With ATVI posting a median move of 2.5% in the session after earnings over the last eight quarters, this time around a 5.9% swing is being priced into ATVI’s ATM options.
Electronic Arts (Ticker: EA)
Another big name in gaming, EA has also been side-winding over the last several months, after acquiring Glu Mobile (Ticker: GLUU) in a $2.4 billion merger in late April.
Chart courtesy StockCharts
Looking into EA’s options pits, call open interest is currently higher than all but 14% of readings taken in the last 52 weeks. EA’s top open interest position is the July 30 144-strike call, indicating traders think EA will hold steady ahead of its earnings call on August 4. After earnings, it looks like up to a 6% swing is being priced into ATM straddles — larger than EA’s median 3.5% post-earnings move.
GameStop (Ticker: GME)
GME may not technically be a gaming stock, in the sense that they don’t develop their own video games, but this meme stock has definitely been one of the most exciting names to watch in 2021.
Chart courtesy StockCharts
GME doesn’t report earnings until September 7, but so far, options traders are pricing in a whopping 31% post-earnings move! This is in comparison to GME’s median post-earnings session swing of 15.1% over the last eight quarters.
Call open interest is only in the 14th percentile of its annual range, with 2.32 puts open for each call, indicating traders are more put-skewed than usual.
Interestingly, GME options buyers are getting in at a bargain right now. GME’s 30-day ATM IV is lower than 97.5% of all other readings in the last 12 months — that’s shockingly low, given its meme-stock status and upcoming earnings report.
Looking at post-earnings options contracts, there is a stark difference between the most popular call and put. The highest open interest position is the September 250-strike call, with 2,420 contracts open. On the put side, the September 150-strike put is the most popular, with just 914 contracts open. It will certainly be interesting to see which side will pile on as earnings draw near.
So in spite of upbeat video games sales forecasts, it seems some of the biggest gaming names are feeling pressure in the options pits. Could this be why hedge funds are pulling out of XLC?
Remember, if you want in on “hedge fund secrets,” we’re cracking open the vault and spilling all the details on July 29 at 8:00 p.m. EST. Register now to save your spot!
Your Only Option,
Mark Sebastian
