Shares of GameStop (NYSE:GME) continue to trade sideways following the latest failed short squeeze attempt. GME stock has seen only two trading days with more than a 20-point range since June 10. While another squeeze attempt is always a possibility, both the buyers and sellers appear to be stepping away for now. Look for the sideways action to continue in GameStop over the coming weeks.
Certainly almost of of us are familiar with the epic short squeeze in GME in late January. Melvin Capital, which had a massive short position, took a hit of nearly 50% in the first quarter as the Reddit retail traders took the stock to nearly $500.
Since then, there have been two subsequent squeeze attempts that were quickly rebuffed at the $300 level. The inability for the buyers to take the stock to anywhere near the all-time highs has likely given pause to the raids.
Technical Take on GameStop Stock
GameStop is about as neutral as possible from a technical perspective.
The 9-day RSI is halfway between oversold and overbought with a reading near 50. MACD is hovering right at the zero line. Momentum has also remained flat over the past few weeks. GME stock has pretty much hugged the 20 day moving average over that time frame as well.
Source: The thinkorswim® platform from TD Ameritrade
GameStop is expected to report earnings on Sept. 8. Consensus is for a loss of 41 cents on revenue of just over 1 billion. Currently the price-sales stands at just over 2x, which is not overly expensive. Since the company has lost money three of the last four quarters, the current price-earnings ratio is negative. As we know, however, the price action in GameStop stock has been all about the squeeze and not the fundamentals.
Short interest has fallen dramatically in the past few months in GME. Currently it stands at just over 8 million shares, well below the nearly 12 million shares from the end of May. Percentage of float short is at 13%, also a big drop. Days to cover, another measure of short interest, is at 1.3.
After some previous harrowing losses, it appears the shorts may have learned their lesson — or at least somewhat. The magnitude of any attempted short squeeze will be less impactful given the lowered short interest. This will help to lower realized volatility as well.
Implied volatility (IV) in GME options has come down considerably from the insane levels it reached to at over 500 in late January. Overall, however, it is still elevated, with August IV still hanging in the mid-90 area. This means option prices are still rather pricey, favoring selling strategies when constructing trades.
So to position to profit from further consolidation in GameStop stock, an iron condor option trade makes probabilistic sense. An iron condor is a neutral trade that involves selling both an out-of-the money put spread and out-of-the money call spread at the same time. It is a defined risk way to harvest premium as long as GME remains somewhat well-behaved. It is, to quote the rock band Dire Straits, “Money For Nothing.”
How to Trade It
Sell GME Aug $150/$145 put spread and Sell GME Aug $215/$220 call spread for a $1.50 total net credit or better.
Maximum gain on the trade is $150 per condor. Maximum risk is $350 per condor. Return on risk is 42.85%. Ideally, GameStop stock closes between $150 and $215 on August 20 expiration to realize the maximum gain. The condor provides over a 17% upside and downside cushion to the $185.81 closing price of GME stock.
The trade expires well before earnings due on Sept. 8 to remove any earnings related risk. The earnings announcement should also serve to dampen volatility in front of the release.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim has appeared on PBS and the Nightly Business report, while maintaining weekly appearance on Bloomberg TV and CBOE-TV to discuss everything from volatility to LEAPs. Tim has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.