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Tue, June 6 at 7:00PM ET

GameStop Stock Is a Short on any Meaningful Rally

  • GameStop (GME) reported yet another earnings miss.
  • Shares look overvalued and overbought.
  • Sell bearish call spreads to get paid to short GME stock in a defined risk fashion.
GME stock - GameStop Stock Is a Short on any Meaningful Rally

Source: Shutterstock / mundissima

GameStop reported earnings last week that beat expectations on the top line, but missed badly on the bottom line. Revenues came in at $1.38 billion, ahead of analyst expectations for $1.32 billion. Earnings, however, were a big miss. The company reported a loss of $2.08 per share, well below consensus of a loss of only $1.45. GME stock responded tepidly after the release.

This marks the fourth straight quarterly miss on earnings for GameStop. Of course, each of those previous four earnings were not really earnings, but significant losses. The cash burn continues.

GME also announced that it plans to launch a non-fungible token (NFT) marketplace by the end of next quarter. To me, this smells of desperation for a company trying to latch their wagon onto the next big thing. Wedbush analyst Michael Pachter agrees. He called the Gamestop’s NFT marketplace announcement “nonsense,” saying it will “have no NFTs for sale and no customers, and wallets they are providing will be empty.”

The news yesterday that Nate Chastain, the former head of product at NFT giant OpenSea has been charged with insider trading, will definitely put a din on the NFT marketplace.

Certainly, the analysts agree that GME stock is a sell. The average price target is $87.13 with a high estimate of only $121.40 and a low target of $30. Not exactly a bullish viewpoint.

The company is also mulling a potential stock split that will be discussed at the shareholder meeting. While a split may be a short-term bullish catalyst, longer term, it seems to be yet another  desperate attempt to keep the share price from sinking further.

Ticker Company Price
GME GameStop Corp. $134.58

Technical Take

Daily chart, RSI, MACD, and Bollinger Percent B of GameStop Corporation (GME)
Click to Enlarge

GameStop is at oversold readings once again. The 9-day relative strength index is back at the 70 level. Moving average convergence divergence is fast approaching an extreme, as well. The Bollinger Percent B is just shy of 100. Shares are trading at a big premium to the widely followed 20-day moving average.

In previous times that all these indicators aligned in a similar fashion, it marked significant short-term tops in GME stock, as highlighted in the chart. The fact that it occurred at the major resistance area of $150 makes it an even more powerful signal. Plus, GME has seen a series of lower highs as each new short squeeze attempt fails at a lower level. The meme mania momentum that fueled previous frenzied short squeezes has definitely cooled considerably.

Shorting GME stock outright can be both risky and expensive. Short interest now sits just under 25%. Borrow rates, or the cost to borrow shares to short the stock, are over 100%! Plus, you never know when a new short squeeze attempt might happen.

Luckily, the options market provides a better and safer alternative to outright shorting GME stock.

Implied volatility has dropped, but is still trading well over 100. This favors option selling strategies when constructing trades. So, to position oneself to profit from continued consolidation, a defined risk bearish call spread makes probabilistic sense.

Selling an out-of-the money bear call spread provides an upside cushion for GME stock to move higher and still have the trade be profitable. You don’t have to be right, you just have to avoid being really wrong. Plus, you get paid upfront and define your risk upfront, as well.

How To Trade GME Stock Now

Sell GME July $160/170 call spread for a $2 net credit.

Maximum gain on the trade is $200 per spread. Maximum risk is $800 per spread. Potential return on risk is 25%.

The short $160 strike price provides a 9% upside cushion to the $146.50 closing price of GME stock. It is also well above the major overhead resistance level of $150.

Traders looking to short an overhyped and over-loved GME stock would be well served to consider the benefits of selling out-of-the money bearish call spreads.

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 Publishing Guidelines.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, four years as Lead Options Strategist at ThinkorSwim and three years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV  “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related.

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