If there’s one stock right now embodying today’s hottest trends and fervent speculative juices, it’s GameStop (NYSE:GME). But if you want to play GME stock, off and on the price chart, a well-placed and flexible collar strategy is the best way to attack and retreat from enemy forces. Let me explain.
“They’re back!!” Well, sorta. A short squeeze stock media circus has cooled off from January’s spectacle and the number of heavily-shorted stocks caught in the crossfire has shrunk. Still, it was back to business-as-unusual this past week in names like AMC (NYSE:AMC) and Koss (NASDAQ:KOSS). Nowhere though was a rogue band of merry retail traders from Robinhood and Reddit’s Wallstreetbets more excitable than in shares of GME.
A second round of crusading in the brick-and-mortar video game retailer resulted in shares of GameStop finishing the week up nearly 150%. At its best, at least as far as ‘Retail David’ is concerned and at the expense of a typically much deeper pocketed Goliath, GME stock gained as much as 355%.
So what gives? There is the fact GameStop remains the market’s most heavily shorted stock. To be fair, it’s not the same short squeeze situation that enjoyed the attention of nightly news anchors and late night television hosts during January’s melt-up, when nearly 1.4x of GME stock’s float was wagered against it. Nevertheless, today’s short interest of 41% is substantial in its own right.
Beyond the day-trading tomfoolery, could GameStop have the business ammo to be a sustainable holding in investors’ portfolios? Possibly.
Late last week CNBC’s “Mad Money” host James Cramer pondered whether GME could justify its share price if it turned into a cryptocurrency play. If GameStop became an early adopter of Bitcoin (CCC:BTC-USD) by selling maybe $1 billion in stock, uses the proceeds to buy crypto, and then pivots its business model into an international gaming place where participants win bitcoin … maybe.
It’s all hypothetical right now. But the first step which GameStop uses its beneficial rise in GME stock value to its advantage is easy enough. Secondaries typically work to the immediate disadvantage of existing shareholders. And for good reason, as the stock is being diluted. But if accessing the capital markets is done for the right reasons, short-term pain can easily be replaced with long-term gain.
Square (NYSE:SQ). Tesla (NASDAQ:TSLA). Nvidia (NASDAQ:NVDA). MasterCard (NYSE:MA). Those market giants are already opening their doors to the crypto market. As much, a step towards integrating BTC into its business model would find GameStop in good company. And from there? There’s never any guarantees. Still, there is a chance that kind of move could put this heavily-shorted stock a firm step closer to turning a profit by 2023 or perhaps even sooner.
GME Stock Daily Price Chart
Source: Charts by TradingView
Late last Wednesday GME stock exploded higher by just more than 100%. In Thursday’s session, bullish GameStop investors remained in the drivers seat as shares jumped another 100% out-the-gate. Since then some smiles have been replaced by frowns and worry lines. GME has retraced just over 62%. Today, the fairly stiff retreat has the stock resting in a less-volatile, but still very unnerving inside doji decision candlestick formation.
For bullish investors that see the pattern pullback as an opportunity to buy on weakness, but wish to have full control over downside risk, a April $85/$200 collar on GME stock is a favored strategy.
Bottom-line, a collar strategy can be used as a dynamically-adjusted spread to trade with the trend if shares do go up from here. At the same time, collars are highly effective at removing undesirable Greek risks. Not to mention maintain ironclad downside protection and avoid downswings that feel like “game over” scenarios but aren’t, as well as those that are.
On the date of publication, Chris Tyler holds, directly or indirectly, positions in listed Bitcoin (GBTC), but no other securities mentioned in this article.
Chris Tyler is a former floor-based, derivatives market maker on the American and Pacific exchanges. The information offered is based on his professional experience but strictly intended for educational purposes only. Any use of this information is 100% the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.
