The king of video game retailers, GameStop (NYSE:GME), is on the ropes after reporting weaker-than-expected same-store sales for the holiday season. The negative news took its share price down a quick 7% in early Tuesday morning trading.
Heading into the holidays, the video game space had a handful of new releases that should have helped spur consumer demand. Activision Blizzard (NASDAQ:ATVI) continued its domination of the first-person shooter space with its release of Call of Duty: Black Ops 2 in mid-November. Microsoft (NASDAQ:MSFT) Xbox 360 title Halo 4, as well as Nintendo’s (PINK:NTDOY) new Wii U gaming system, also were anticipated to boost sales over the holidays.
Click to Enlarge These new releases, coupled with a general feeling of optimism, drove GME shares from a lowly $15.32 in August to over $28 in December — an impressive rise of 85%. So despite today’s drubbing, GME remains well off its 52-week lows.
More recently, GME has fallen below its 20- and 50-day moving averages with multiple high-volume down days, so the intermediate uptrend is definitely in jeopardy.
Traders looking for GameStop to remain under pressure until its next quarterly earnings announcement on March 18 could consider entering bear put spreads. If you’re looking to exploit more immediate weakness, you could purchase the February 24-22 put spread for 85 cents or better. The risk is limited to the initial 85 cents paid, and the reward is limited to the distance between strikes minus the net debit, or $1.15.
If you want a little more time for the bearish thesis to play out, you might instead purchase an April 24-22 put spread for 95 cents or better. The risk is limited to the initial 95 cents paid, and the reward is limited to the distance between strikes minus the net debit, or $1.05.
Both spreads are positioned to capture the max profit if GME falls beneath $22 by Feb or April expiration. In timing the entry, I’d suggest waiting for some type of bounce in GME shares before pulling the trigger. It rarely pays to chase a stock when it has already fallen 7% in one day.
As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.