3 Ways to Play GameStop Into Earnings

Gamestop (NYSE:GME) shares are percolating for the first time since June’s earnings report sent speculators packing. The awakening has been as sudden as its predecessors and now has GME stock back in an uptrend with pristine technical patterns. If not for the imminent quarterly report, buyers would have a green light to participate in the next squeeze.

Retailers walk past a GameStop (GME stock) store in New York City, New York.
Source: Northfoto / Shutterstock.com

But, as I said, there’s this pesky business of a volatile, uncertain event looming large. Earnings haven’t been kind to GME this year. The past two events torpedoed the stock, singlehandedly destroying its upside momentum.

Unless something dramatic has changed about the company’s fundamentals over the past quarter, there’s a decent chance the Sept. 8 report will play out similarly.

And that should scare off short-term traders unwilling to stomach the risk.

But look. I’ll be the first to admit that a sample size of two is hardly worth reading into. Perhaps the past two earnings episodes were a fluke, and the third time’s the charm.

Maybe Gamestop’s fearless leaders will pull a rabbit out of the hat to justify the stock’s stratospheric valuation. Crazier things have happened. Rather than take a stab at guessing the direction of the gap, let’s agree on the following:

  • One: It’s a coin flip.
  • Two: It’s going to be volatile.
  • Three: We’re playing in the deep end of the pool here.

If you have a mind for speculating here, here are your three choices.

The Safe Road for GME Stock Trades

Starting on Wednesday, six trading sessions remain before the quarterly report. At the same time, GME is on the cusp of triggering a high base breakout setup. Since blasting higher on Aug. 24, prices have been skirting sideways in a tight range. This type of price action is extremely constructive and usually presages more gains. If you think buyers will juice the stock into earnings like last quarter, then now is the time to pounce.

Gamestop (GME) stock chart with high base breakout
Source: The thinkorswim® platform from TD Ameritrade

The narrow time window makes options trades tricky, so I suggest buying straight equity. Place a stop loss below the low of the base at $192 to minimize the damage if things sour. Then, root for a big pop over the next week and bail before the market closes on Sept. 8. This sidesteps the earnings drama altogether.

The High Probability Road

If you’re willing to limit your gain in exchange for juicing your odds of success, then this next idea is for you. Sell far out-of-the-money puts. Consider it a bet that GME won’t completely implode over the next month. It capitalizes on the sky-high implied volatility and traders’ willingness to pay out the nose for insurance.

The Trade: Sell the October $75 put for 60 cents.

By selling the put, you are obligating yourself to purchase 100 shares of GME at $75. Therein lies the risk. The market is only pricing in a 1% chance of you being assigned. Said another way, there’s a 99% chance you’ll pocket the $60 per contract profit.

The Moonshot

Let’s say you want to bet on fireworks. Specifically, you think GME could ramp beyond $300 again. In that case, you’ll want to build a spread that delivers eye-popping profits to reward you for such a brave bet. Long calls are costly, so you’ll want to enter a spread trade to offset the cost.

The Trade: Buy the October $250/$300 bull call vertical spread for $9.75.

The max loss is $9.75 and will be forfeited if GME stock sits below $250 at expiration. The max gain is $40.25 and will be captured if prices rise beyond $300 by expiration.

On the date of publication, Tyler Craig 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.

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