GameStop’s Volatile Market: Exploring Speculative Trading Tactics (NYSE:GME)

Dennis Diatel Photography I don’t think GameStop Corp. (GME) makes a lot of sense from a fundamental investing point of view. Earlier this month, I’ve explained why in this article. Many people are speculating on further bullish price action anyway. I can certainly understand that, if only because of the unbelievable run it went on in 2021. Also, as Sun Tzu said: “In the midst of chaos, there is also opportunity.” I’ll explore the option position I’m considering. One thesis I see floating around on X is that market-makers are cornered by Roaring Kitty’s calls. This theory seems extremely far-fetched to me. This is what their job. They do understand options better than almost anyone. There is a history of this exact stock blowing up like nothing else. It is their exact strategy to capture small profits on countless trades while more or less neutralizing their book. The more action GameStop gets, the more likely they’ll come out looking great. Having said all that, if you want to speculate this stock is going up or at least receiving numerous positive flows for a while, there are more and less reasonable ways to express that trade. In my prior GameStop article (dated June 4), I favored selling some GME out-of-the-money puts: What I did do is to sell a small amount of short-dated out-of-the-money puts. Their pricing reflects the very high volatility in the name. I can imagine the stock giving up most of the gains, but possibly option markets overestimate the likelihood it will fall below $10 given the cash raised through fresh stock issuance and the optionality of that being repeated. On June 11, the company issued a huge amount of stock, which I’d say helps this position a great deal. The cash, raised beyond $10, increases the floor of the stock price. It should also decrease the “normalized volatility” of the company. I mean the volatility that options should be priced at when this market isn’t in this incredible explosive state. I think this is still a reasonable way to go about things, as far as anything is reasonable in this speculative territory. The thing I currently like best is to buy a long-call spread position. I’m writing this article pre-market. The stock is currently down 3%. My option software is based on closing prices. It should be possible to get somewhat more favorable prices than the example I’m presenting here. One thing that looks reasonable to me is to buy a June 28 $20 call and sell a $28 call. GME call spread payoff profile (optionstrat.com) This call spread results in a profit if GME is above $23.45 at expiration. The maximum loss is reached around $20. The maximum profit at $28. The max loss is $345 while the max profit is $455. This pricing seems to imply the market believes it is most likely the stock will be below $23.45 in 14 days. Given 1) it is currently around ~$28, 2) there is an AGM (with a lot of buzz around it) upcoming, 3) the options, with enormous interest for calls, are one of the most heavily traded in the world, that seems unlikely. A bull call spread I don’t like nearly as much is the June 28 $60/$65. This loses only $35.50 per contract at the max. The maximum profit is $464.50. The potential payout multiplier is great (lots of leverage). However, it only breaks even above $60.36. That’s a 108% move-up in 14 days. Many people are likely looking to leverage a small amount of money into a significant amount. It is also possible market makers use the wings as additional hedges to safeguard themselves against extreme moves. This potentially enables them to be more liberal, picking up profits closer to the money. They could be aware that these are -EV trades by themselves but figure that’s offset by these increased profits. GME call spread payoff profile (optionstrat.com) Obviously, a 108% move is something that could happen with GameStop. However, it is a considerable move. It requires another ~$12 billion of market cap to be added. It helps a lot that GameStop just rammed 75 million new shares into this latest surge and exhausted its ATM-program. I don’t think it is unlikely that GameStop will do that again. I do think it is unlikely it will happen before June 28. Another equity offering likely requires a board meeting, drafting new documents and requires the SEC to look at it. It’s not inconceivable the SEC would view this as an important case. An argument could be made the closer far out-of-the-money call spreads are somewhat more attractive than expirations that are a bit further out. GameStop Corp. is a very dangerous stock, and options are dangerous instruments. Be careful out there. I do some very minor speculating on this name. One of the reasons for doing so is to learn more about options and speculative parts of the market. It appears to me that options really do offer opportunities as well, but I could be wrong. What I’m personally looking to do is to buy some in-the-money or at-the-money call spreads and sell far out-of-the-money call spreads IF I can get prices I like (see the examples above). I’ll do this in a minimal size and monitor the positions closely.

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