Market Insights

Videogame stocks are still hurting from last year’s selloff in tech. But now options traders are defending a key level in major stock.

We’re talking about Activision Blizzard (ATVI), which makes titles like Call of Duty, Candy Crush and Overwatch. The stock briefly touched under $40 in February — at the time a two-year low. It rebounded and hasn’t closed within $1 of that price since.

An options trader placed a lot of confidence in the same level yesterday morning, selling almost 17,000 July 40 puts. Initial blocks changed hands for $0.27, but premiums quickly fell to $0.24 as the transactions crossed. Volume was more than 14 times previous open interest, an indication that a new position was begun.

Puts fix the price where a stock can be sold, so they make money to the downside. Investors buy them to hedge against a drop. Selling is just the opposite, with traders collecting income up front and then hoping the shares remain above the strike.

In this case, they’ll enjoy maximum profit of about $0.24 to $0.27 per share if ATVI stays over $40 on expiration. There’s significant downside risk not very far below that level. (See our Knowledge Center.)

So why take the chance? Sometimes investors sell puts when they like a stock but don’t want to pay now. The strategy can effectively turn into a standing buy order at a certain price. Another potential benefit is the 91 percent probability the contracts will expire worthless.

ATVI ended the session down 1.21 percent to $45.07. It rose about 700 percent between early 2013 and late last year, but then lost about half its value as it struggled with competition from free games like Fortnite and Apex Legends. More recently, attention has shifted to the prospect of videogames migrating to cloud-based platforms run by Microsoft (MSFT) and Alphabet (GOOGL).

In conclusion, put volume is often a bearish sign. But Monday’s activity in ATVI reflects a belief that the industry’s biggest player has put in a bottom for now.