Video game software and hardware retailer GameStop (GME) will get to pop its quarter into the earnings cabinet after the close of trading this Thursday. The company has struggled with Wall Street’s expectations this year, besting the consensus twice and missing twice in the past four quarters.
That said, GameStop stock might be able to parlay a market bounce into a post-earnings rally, much to the chagrin of GME short sellers.
Getting straight to the numbers, Wall Street will be looking for a profit of 25 cents per share from GameStop, a figure that is up 3 cents from the 22 cents per share earned in the same quarter last year. Revenue, meanwhile, is seen coming in essentially flat at $1.74 billion.
Turning to GME’s sentiment backdrop, there is plenty of optimism to go around. For instance, EarningsWhisper.com reports that GameStop’s second-quarter whisper number comes in a penny higher than the Street at 26 cents per share. Furthermore, 10 of the 17 analysts following GameStop stock rate it a “buy” or better, with no “sells” to be found.
There is room for improvement, however. Currently, the 12-month consensus price target rests at $49 per share — a meager premium of only about 11% to yesterday’s correction-driven close. If GameStop can hit Wall Street’s earnings mark and show even moderate signs of growth via guidance, it could be enough to spark a few price-target increases.
On the other hand, short sellers are loaded for bear. Following a 1% increase during the most recent reporting period, the number of GME shares sold short now stands at 44.8 million shares – representing a whopping 43% of the stock’s total float. At GME’s current average daily trading volume it would take roughly 33 days to buy back this massive short position. Because of this, GME is a very good candidate for a short-squeeze play that could send the stock soaring on any positive news as short sellers rush to cover their bets.
If GME’s options configuration is any indications, short sellers are already feeling a bit uneasy. While the August/September put/call open interest ratio currently stands at a middle-of-the-road 1.06, the weekly Aug 28 series ratio arrives at a bullish 0.51. Since short sellers often buy calls ahead of an earnings event to hedge their positions, it is a good bet that many are looking for protection against a potential post-earnings rally.
Click to Enlarge Overall, weekly Aug 28 series options are pricing in a potential post-earnings move of about 8.3% for GME stock. This places the upper bound at $47.65, while the lower bound lies at $40.35. On the upside, GME’s 10- and 20-day trendlines are hovering just above $45.
Once these trendlines are breached, it’s relatively smooth sailing until the $50 region, which is home to the stock’s 50-day MA.
2 Trades for GME Stock
Call Spread: Those traders looking to bet on a potential short-squeeze and or positive earnings reaction might want to consider a Sep $45/$47 bull call spread.
At last check, this spread was offered at $1.30, or $1630 per pair of contracts. Breakeven lies at $45.30, while a maximum profit of $1.70, or $170 per pair of contracts, is possible if GME closes at or above $47 when September options expire.
Put Sell: On the other hand, if you’re not willing to bet on a GME rally, then a more neutral strategy might be worth considering. At last check, the weekly August 40 put was bid at 47 cents, or $47 per contract. The upside to this put sell strategy is that you keep the premium as long as GME stock closes above $40 when these options expire at the end of this week. The downside is that should GME trade below $40 ahead of expiration, you could be assigned 100 shares for each sold put at a cost of $40 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
