GameStop Corp. (NYSE:GME) is slated to slip into the earnings limelight after the close of trading tomorrow, and a look at Best Buy Co Inc’s (NYSE:BBY) results may offer a bit of a warning for the quarter.
While Best Buy posted blowout quarterly results, the company noted that increased demand for appliances and computers offset slower sales of video games and mobile phones.
That last bit — slower sales of video games — doesn’t bode well for GME stock.
Admittedly, the summer is not typically a hot buying season for videogames, and this summer has been particularly slow. In fact, GameStop is expected to see a 13% decline in earnings year-over-year to 27 cents per share. Revenue is also seen lower, dropping 2.6% to $1.72 billion.
Still, EarningsWhispers.com reports a whisper number of 31 cents per share, so some analysts are anticipating better-than-expected results.
That said, the holiday shopping season is nearly upon us. What’s more, this season appears to be chock full of potential blockbusters, including Final Fantasy XV, Titanfall 2, Destiny: Rise of Iron and The Last Guardian — all slated for release in the next couple of months. As such, guidance could make or break GME’s reaction to GameStop earnings.
Turning to the sentiment backdrop, we find quite the mixed bag. On one hand, Zacks data reveals eight buys, four holds and just one sell rating. However, the 12-month price-target of $35.10 represents a modest premium of only about 9.4% for GME stock.
On the other hand, short sellers are loaded to the gills on shorted GME stock. Following a 15% increase during the most recent reporting period, the number of GameStop shares sold short now stands at 31.8 million — representing 31.25% of the stock’s total float. With stiff technical resistance in the $32-$33 region, these shorts make some sense, but a surprise upside reaction following earnings could create a short-squeeze play that exacerbates GME stock’s rally.
To combat the potential for earnings-related losses, short sellers may be loading up on weekly August 26 series call options. Currently, the put/call open interest ratio for this series rests at a bullish 0.65, with calls nearly doubling puts.
Click to Enlarge However, September options traders are all kinds of bearish, with the put/call ratio coming in at 2.78 as puts nearly triple calls for the series. A closer look at September reveals more than 10,000 contracts at each of the $31 and $32 strikes, hinting that bear put spread activity may be in the works.
Overall, weekly August 26 series options are pricing in a potential post-earnings move of about 7.6% for GME stock. This places the upper bound at $34.52, while the lower bound lies at $29.66 from Tuesday’s close. This range offers up the potential for GME to breach either support at $30 or resistance at $33, which could bring additional technical buying or selling into the equation.
2 Trades for GME Stock
Call Spread: Those traders looking for GameStop to at least meet expectations and potentially surprise on guidance might want to consider a Sept $33/$34 bull call spread. At last check, this spread was offered at 42 cents, or $42 per pair of contracts. Breakeven lies at $33.32, while a maximum profit of 58 cents, or $58 per pair of contracts, is possible if GME closes at or above $34 when September options expire.
Put Spread: On the other hand, given the potential for a lackluster quarter, and no guarantee that guidance will be anything special for the holiday shopping season, traders might want to side with the bearish contingent in the options pits. Along those lines, a Sept $31/$31.50 bear put spread offers up a nice potential profit.
At last check, this spread was offered at 17 cents, or $17 per pair of contracts. Breakeven lies at $31.33, while a maximum profit of 33 cents, or $33 per pair of contracts, is possible if GME stock closes at or below $31 when September options expire.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
