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Activision Blizzard has lost half its value in 4 months, but traders are betting big ahead of earnings next week

Key Points
  • Video game stocks slid on Wednesday following disappointing earnings from Electronic Arts and Take-Two Interactive.
  • Activision Blizzard reports earnings on Tuesday and traders are betting the stock moves higher by the end of next week, according to Investitute's Jon Najarian.
  • Competition from free-to-play games like Fortnite has weighed on traditional video game creators over the past year: Electronic Arts has shed 35%, Activison Blizzard 38%. Take-Two Interactive is down 21% over the last 12 months.

Activision Blizzard has lost half its value in just four months, but traders are betting big on the stock ahead of next week's earnings.

Shares of the video-gaming giant slid just over 10 percent during Wednesday's session after competitors Electronic Arts and Take-Two Interactive posted disappointing earnings.

But investors are betting the quarter might have been a better one for Activision Blizzard, which reports next Tuesday after the close.

On Wednesday traders bought more than 16,000 Activision Blizzard calls at the February 46 strike price, according to Investitute co-founder Jon Najarian.

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Traders bet on Activision Blizzard and this under-performing chip name

These particular calls expire next Friday, so traders are betting the stock will bounce 7 percent by then. (Activision Blizzard closed at $43 on Wednesday.)

The video-gaming giants have been hit hard in the past year as they struggle to compete with free-to-play games like the very popular Fortnite. Take-Two is down 21 percent in the last year, with Electronic Arts and Activision Blizzard falling 35 percent and 38 percent respectively.

While traders may be betting on a short-term pop, Aureus Asset Management's Karen Firestone believes these are not good stocks to own for the long-term.

"We used to be a big fan of Electronic Arts and we're not now," she said Wednesday on CNBC's "Halftime Report." "We saw the writing on the wall to the extent that it's become a hit-driven game, and when it was two companies that controlled the hits that was fine if they were Activision and EA. And now you've got new companies like Fortnite … I think it's extremely hard for these guys to compete now in the way they used to," she added.

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Video game stocks crushed

On the flip side, Ritholtz Wealth Management's Josh Brown notes that while competition has increased, there are also new ways for video game creators to make money.

"There are new monetization methods that did not exist in the old duopoly … If you bought a first-generation playstation game, that was the end of money that Sony saw. Now, selling the game is just getting you hooked, and they're selling you clothing for your character. And these are brand new revenue streams that never existed for the industry. So yes, more competition, way more monetization opportunities," he said.

Activision has lost nearly half its value in the span of just 4 months. Shares have fallen 49 percent since reaching a 52-week intraday high of $84.68 on October 1. Electronic Arts is 47 percent from its recent high in July.

- Jon Najarian owns Activision Blizzard calls.