GameStop (GME) stock is down close to 3% in late morning trading on Thursday. If it holds, it will be the video game retailer’s seventh consecutive day in the red.
I’ll admit, I’m the last person who would write a glowing piece about the company, its stock, or wonderboy CEO Ryan Cohen.
I believe the company has wasted more than two years trying to become something it isn’t: a thriving business. And, because it’s played around with crypto, collectibles, online gaming, etc., it hasn’t fixed its core business of buying and selling video games and gaming hardware.
And don’t get me started about its crappy stores. They’re hideous. Could you imagine if GameStop were a clothing store? No one would shop there, but the retail footprint is left to rot because gamers don’t care about aesthetics.
InvestorPlace contributor Chris MacDonald recently discussed why GME stock is going to zero -- full disclosure: InvestorPlace is one of my other writing gigs -- arguing that Cohen has failed to diversify away from video games.
I would suggest that, while true, Cohen’s bigger sin is that he didn’t come in and cut the retail footprint in half, taking the remaining store locations and renovating the heck out of them. Maybe putting Dutch Bros (BROS) coffee bars in the locations where it made sense, etc.
You know, at least fake that you care about the customer experience.
I think you get the point: I’m not a fan.
However, looking at Wednesday’s unusual options activity, if you are a fan (scratches his head!) and a particularly aggressive investor, you have got to take a closer look at GME’s unusually active options.
There’s money to be made there.
A Trio of Puts
I’m sure you think I will discuss the put options to buy as a short bet against the company. Well, you could do that, and you’d probably make money given what a nightmare GameStop is, but I’m more interested in selling them for the possible income.
As I write this, no puts or calls (expiring a week Friday or later) exhibit unusual options activity. However, yesterday, there were three unusually active puts with Vol/OI ratios of 1.25 or higher.
These are what I’m going to talk about.
I’ve got two puts with a $10 strike price and one with a $12 strike. I’ll start with the former.
The puts in question are Dec. 15 $10, and April 19/2024 $10. Their bid prices were $0.29 and $0.99, respectively. The December put has an annualized yield of 13.2% based on its Wednesday closing price of $13.85. The April 2024 put has an annualized yield of 14.2%, 100 basis points higher.
Buy the 2024 put, you say? Not so fast. Here’s why.
The put expiring in 58 days only had a volume of 578 yesterday, 1.25x its open interest. It's not excessively unusual. However, the odds of GME stock falling below $10 in the next two months seem minimal, given it hasn’t traded below $10 since the beginning of meme-stock fever in January 2021.
As a friend used to say, “I couldn't give a rat’s patoot about GameStop,” I’m interested in the income play here. It looks very doable.
As for the April 2024 put, it expires in 183 days or six months. It had a Vol/OI ratio of 98.13 yesterday. Remember, we’re talking about put options. They are intended to be used to mimic shorting a stock. Yes, you can sell puts, which is a bullish move, but when you see volume of almost 100x the open interest with half a year to expiry, I’m guessing those investors feel GME will be well below $10 by April.
If you were to sell the April 2024 put, the net price you’d pay for GME shares if they asked to buy them would be $9.01. So, GME’s share price has to fall (again, I’m basing this on its Wednesday closing price) 35% before you start losing money.
The tradeoff, then, is you’re exposing yourself to greater time decay in return for an extra percentage point of yield.
Because I’m a GME skeptic, I’d go with the December put, but that’s just me. The 2024 put is appealing as an income play.
Finally, the third put is the April 19/2024 $12. The same 183 days to expiration buy with an annualized yield of 24.7%. Wowser.
Of course, GME’s share price only has to fall 26% before you’re losing money ($10.29 net price for shares).
I wouldn’t touch this one, but if you believe it will be higher than where it currently trades in six months, you can’t knock the potential return, almost double the other two.
The Bottom Line
Here is how the three puts are doing in Thursday trading:
- Dec. 15 $10 strike has a bid price of $0.32, three cents higher than yesterday.
- April 19/2024 $10 strike has a bid price of $1.04, five cents higher.
- April 19/2024 $12 strike has a bid price of $1.85, 14 cents higher.
It makes sense given that its shares are down more than 3%.
Anyway, even though I’m not a fan, you can make money on these, but be prepared to pay $1,000 to $1,200 to buy the shares should they be put to you.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
