Based on recent options trading activity, GameStop Corp. (GME) -) stock could be poised for another rally.
The video game retailer’s sales have declined as demand has shifted online. However, it became a fan favorite among Wall Street Bets investors on Reddit late in 2020. Hope that GameStop would reinvent itself under guidance from billionaire investor Ryan Cohen caused shares to skyrocket from $1 in 2020 to over $120 in early 2021.
It’s been a rough ride for shareholders since then. GameStop stock currently trades below $15 per share, leaving many investors underwater. Nevertheless, recent option buying suggests some think GameStop could be poised for another meme stock rally.
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GameStop rises to fame on meme stock craze
GameStop’s (GME) -) rapid run-up after the Covid outbreak was fueled in part by easy money policies, including record low interest rates, which made it cheap to borrow money to buy stocks on margin, lockdowns, which increased interest in day trading, and stimulus payments, which provided Main Street investors like those on Reddit with money to open brokerage accounts to trade stocks.
The video game company entered the limelight when Wall Street Bets member Keith Gill highlighted the company as a value stock worth buying in July 2020.
Related: GameStop stock higher as billionaire investor Ryan Cohen assumes CEO role
However, shares didn’t really take off until January 2021, when GameStop announced it was appointing Ryan Cohen, the former Chewy founder, Alan Attel, former Chief Marketing Officer, and Jim Grube, former Chewy Chief Financial Officer, to its board of directors.
The appointment of these e-commerce titans ignited hope that GameStop could evolve from a failing mall-based retailer into an online gaming dynamo, catching those betting against the stock flat-footed.
At the time, GameStop’s short interest had ballooned as hedge funds became overly complacent in the likelihood that the company's brick-and-mortar footprint would be its undoing.
With the increase in Wall Street Bets membership from 3 million to 8 million members in January 2021, more investors turned to online brokers like Robinhood to open positions in GameStop, including using margin. The buying cascade caused share prices to rise, causing a domino effect that forced those who were betting against GameStop to buy shares to replace the ones they’d borrowed to sell short.
Traders bet on another meme stock rally
Ryan Cohen is still at GameStop, serving as the company’s CEO and Chairman of its board of directors. He also still owns about 12% of GameStop via his investment fund, RC Ventures.
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This week, activity in GameStop’s December call options soared, suggesting at least some of Cohen’s fans expect the company to say good things when it reports earnings on Dec. 6.
Specifically, Bloomberg reports that Dec. 8 call options with a $20 strike price (the price call buyers will pay if the call option is exercised) traded 17,500 times on Nov. 28.
Most of these positions were new and traded in small amounts, suggesting buyers were Main Street investors, rather than institutions.
A move to $20 would be impressive, given shares are currently trading around $13.50. Shares don’t normally rise by over 50% in a matter of days, but it's possible that option buyers hope to create a frenzy that, at a minimum, causes some short sellers to cover again, allowing them to sell their calls at a profit.
Currently, over 60 million shares are held short, representing roughly 23% of the company's share float, or the number of shares readily available for trading. At average daily trading volume, it would take short sellers roughly 18 days to reverse course and cover their positions, making it an ideal candidate for a squeeze.
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