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ERTS So Good

Options traders continue to hit the reset button on what is fast emerging as their favorite game: playing Electronic Arts for a takeover. On little news today, the May 21 and 22.5 calls were particularly active, with the 22.5 strike calls seeing 21,000 contracts trading hands.

"This is bullish activity. People were buying these calls," said Mike Khouw, "Options Action" star and director of Cantor's equity derivatives desk. ERTS has been a frequent target of takeover speculation, and one we've talked about on O/A (Options Action for those not in the know yet). The game maker is currently sitting on about $8 bucks in cash, has no debt, and sports a slew of great properties, including the Madden NFL franchise. (Full disclosure, when I was in high school, my brother and I squared off in Madden slug fests that set indoor records for length and probably could have served as a PSA against video games). It's trading at a 20 forward multiple, but net-of-cash, it's actually trading at about 12-times next year's earnings, so the valuations are compelling too.

But despite all that, according to some industry watchers, the chances for a takeover are slim at best.

"Management does not want to sell," said Heath Terry, analyst over at Friedman Billings. "They are in the fast-growing, high value corner of the entertainment industry."

According to Terry, the two most frequently mentioned suitors, Microsoft and Disney, would most likely pass on an ERTS deal, for different reasons. If Microsoft bought Electronic Arts, it would risk owning too much share of the game space that runs on its own system. That would provide a disincentive for game makers to continue to develop products for Microsoft, and that would ultimately leave Mr. Softy controlling a much bigger slice of a shrinking pie.

In the case of Disney, the Mouse House may be suffering from sticker shock.

"I just can't see Disney, which doesn't have a ton of cash on hand, widely overpaying for a game maker in this environment," Terry said.

So at $20 bucks, buying the stock seems like a fool's errand to this column. But for takeover junkies, my good friend Dan Nathan of Phoenix Partners Group(and "Option Action" star) whipped up a interesting trade.

He suggested selling the Jan 15 put for about $1.50 and using that cash to finance the purchase of the Jan 25 calls for $2.00, for a total cost of .50. If nothing happens and the stock tanks, you're looking at getting long the stock at equivalent of $15.50, or about 24% lower than current levels. But for $50, you get unlimited upside above $20.50 should a huge deal miraculously materialize by Jan expiration.

Questions, comments send them to us at: optionsaction@cnbc.com

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