GameStop: 2 Ways to Play GME Stock

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Once the premier video game retailer, GameStop Corp. (GME) has struggled on the earnings front as the rise of online sales and the digital marketplace have cut deeply into the company’s bottom line. But GameStop has done an admirable job of reorienting itself to take advantage of online and digital sales. Plus the lure of impulse purchasing and nostalgia of browsing the video game racks bodes well for GameStop’s future growth.

GameStop: 2 Ways to Play GME StockIn fact, these are some of the drivers that GME stock holders and potential buyers will be looking for when GameStop steps up to release its third-quarter earnings report tomorrow.

GameStop Earnings and Sentiment

For the record, GameStop is expected to post a profit of 61 cents per share, on revenue of $2.21 billion. During it’s second-quarter report, the company projected third-quarter earnings guidance of 58 to 64 cents per share. Whispers on the Street are pointing toward the upper end of that range, however, with EarningsWhisper.com reporting a third-quarter whisper number of 64 cents per share for GameStop earnings.

The company has a somewhat bullish following within the brokerage community. According to Thomson/First Call, GME stock has attracted 13 “buy” ratings, compared to just six “holds” and only two “sells.” Elsewhere, the 12-month consensus price target of $52.50 represents a modest premium of about 19% to Tuesday’s close at $44.02.

This bullish sentiment doesn’t extend outside of the analyst community, however. For instance, more than 37 million shares of GME stock are currently sold short, representing a hefty 33.7% of GameStop’s total float, or shares available for public trading. This wealth of short interest would provide more than enough fuel for a sizable short-covering rally if the company were to offer up a blowout report or strong guidance tomorrow.

What’s more, if these short sellers are nervous, it isn’t showing up in GME’s options activity. Typically, short sellers buy call options as a way to hedge their bets heading into volatile events such as earnings reports. The November/December put/call open interest ratio for GME stock currently stands at 2.13, with put open interest more than doubling call open interest among short-term options.

Furthermore, when we zero in on the front-month November series (i.e. those options set to expire at the end of this week and would be most affected by tomorrow’s quarterly report), this ratio becomes even more bearishly skewed. Specifically, the November put/call open interest ratio arrives at 3.06, with puts more than three times as popular as their bullish call counterparts.

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Overall, November option implieds for GME stock are pricing in a potential post-earnings move of more than 10%. This places the upper bound at $48.65, while the lower bound lies at $39.35.

Technically, $45 is an area of key resistance for GME stock, meaning that a breakout above this level could prompt additional buying. Meanwhile, a dip to the $39 level would put GME stock back below their 200-day moving average, potentially sending more investors back to the sidelines.

2 Options Trades on GME Stock

Straddles: All in all, GME stock appears ripe for a potential straddle position heading into tomorrow’s report. If you’re game, the Dec $44 straddle was asked at $6.39, or $639 per pair of contracts, at last check. There are two breakeven points for this trade — at $50.39 on the upside and $37.61 on the downside, with profits . As you can see, this trade requires a considerable move from GME stock prior to expiration on Dec. 20. While implieds are pricing in a move that takes GME stock to the edge of breakeven on this straddle, follow-through buying or selling on the news should make up the difference.

Bull Call Spreads: On the other hand, if you are willing to buck the trend and take a bullish stance on GME, the potential for a short-covering rally could make a Dec $44/$48 bull call spread quite profitable. At last check, this bull call spread was offered at $1.62, or $162 per pair of contracts. Breakeven lies at $45.62, while a maximum profit of $2.38, or $238 per pair of contracts, is possible if GME stock closes at or above $48 when December options expire.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/11/gamestop-corp-gme-stock-options/.

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