I apologize in advance because I’m pretty sure I’m going to offend some of the readers. It is impossible to write about GameStop (NYSE:GME) stock and not cause a ruckus.
GME stock is as emotional as they get. There are lovers and haters of it and nothing in between. I’ve kept myself from engaging emotions to be a better trader. I simply concentrate on trading the levels, so I don’t judge it as an investment.
Today most of my comments will be about trading it more so than investing. The long-term thesis is pretty simple and doesn’t need my blessing. The business fundamentals are in transition and buying it as an investment is a viable thesis. There is no wrong or right about that and time will be the ultimate judge.
GME Stock Rallies
I mentioned that the company is in transition because the environment changed.
Kudos to management that they’ve done so well in spite of it. Revenues are now 38% lower than 2017, and that’s a lot of top line pain. However, they managed to maintain a decent bottom line. Some of the other debt-to-equity ratios need fixing but that can come later.
This dovish environment encourages debt and it’s cheap. As long as the Federal Reserve doesn’t go crazy with the taper and QT it won’t be an issue.
The more impressive feat than management is GME stock. It is up an astonishing 4,300% in a year. At one point in January that was more than 10,000%. Whatever the reasons for the rally, the SEC allowed for the action to happen. It is in the books and now historical facts.
They say “don’t fight the tape” and that’s exactly what they mean. Shorting because someone doesn’t agree is silly.
One of a Kind
So far I’ve been more positive on it than even I thought I would be. This is not a stock I would invest in for the long term. It’s just not my jam. I need more concrete prospects than I currently see. I may not have looked hard enough, but I also don’t want to. On the other hand, I enjoyed trading the GME stock price action in the short and mid terms.
This is not an task easy seeing how fast it moves in both directions. I didn’t know how high the implied volatility can rise until I saw it in GME. When the Reddit versus hedge fund battle was at its peak, both puts and call options were gaining. If you don’t know options, trust me when I tell you that should not happen.
Back then, I owned puts (bearish position). The next day the stock spiked more than 100% and my puts gained. I more than tripled my money on a losing trade. Well, it should have been a losing trade.
The short story here is that logic need not apply. GME started a movement on Reddit and it’s defying gravity on Wall Street. It now has a posse of tickers like AMC Entertainment (NYSE:AMC) and Clover Health (NASDAQ:CLOV) to name two.
Investors need a strong stomach and decent charting skills. Of course, luck is always a factor, but it’s wrong to purely rely on that. The good news is that machines are still in charge. Experts tell us that they are responsible for about 80% of the action. This makes them predictable and gives us humans a chance at scalping short-term profits.
How I Trade GME Stock
One thing I would say right off the bat is that I would never short it. The traditional methods for shorting GME stock are a no-no for retail investors. Those unlucky to have been short ahead of the original spike went broke. Even the pros went belly up trying to do it. Those who insist on shorting it should use simple put options or spreads. It is the safer alternative.
This year’s price action, as wild as it was, has given us three baselines. The bulls have consistently bought the dips into $133, $118 and $100. Most recently, GME found footing above $156 per share. The assumption now is that it will hold again. The next drop close to that presents a buying opportunity, with a tight stop. Because if it fails it would trigger bearish pattern targeting $100 or lower.
Conversely, there are sellers lurking through $225 per share. But taking that out would also be an opportunity to chase it. There is likely to be heavy selling near $205 per share. Every tough spot becomes the opportunity as long as the bulls are this brave. Knowing when to exit is also important and I would consider booking profits at 25%. At $180 per share, there aren’t catalysts in either direction.
My trading strategy would be to buy the dip or buy the breakout (pictured). Trade the range inside the box, or chase the breaches of either sides.
I find it futile to guess what’s going to happen. I have better success when I wait for the confirmation then chase.
On the date of publication, Nicolas Chahine 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.
Nicolas Chahine is the managing director of SellSpreads.com.