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Bearish GameStop Traders Wager on a Decline

Speculators take a shine to GME's December puts

by 10/24/2012 9:42 AM
Stocks quoted in this article:

GameStop Corp. (NYSE:GME - 23.02) was abuzz with bearish options activity on Tuesday, as more than 8,400 puts crossed the tape. This was nearly five times the equity's average single-session put volume, and over six times the number of calls exchanged.

The front-runner during yesterday's session was the out-of-the-money December 21 strike, where 4,033 puts changed hands. According to TradeAlert.com, a large block totaling 3,542 contracts was purchased for $0.88 each. What's more, open interest at this strike rose by 4,031 contracts overnight, confirming that almost all of yesterday's volume was comprised of new positions. In order for traders to realize a profit on their bearish positions, the stock must retreat below $20.12 (strike price minus premium paid) by the time December options expire.

From a broader sentiment scope, however, calls are the options of choice on the equity. In fact, data pulled from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows a 50-day call/put volume ratio of 2.25 for GME, indicating calls bought to open have more than doubled puts during the past few months. This ratio resides in the 62nd annual percentile, meaning traders have been purchasing calls over puts at an accelerated pace.

As a result, GME's Schaeffer's put/call open interest ratio (SOIR) checks in at 0.77, conveying calls comfortably outstrip puts among options scheduled to expire in the next three months. However, due to yesterday's uptick in put activity, this rising ratio now arrives in the 59th percentile of its annual range, meaning near-term puts are starting to gain some traction over their bullish counterparts.

Meanwhile, although short interest on the video game guru declined by 4% during the past month, these pessimistic bets still make up a hefty 37% of GME's available float. This raises the possibility that skeptics seeking to hedge their positions are responsible for some of the recent call buying. Either way, it would take more than three weeks to unwind these shorted shares, at the stock's average daily trading volume.

Elsewhere, the majority of analysts covering the security maintain a downbeat attitude toward GME. The stock sports seven "strong buy" recommendations, versus nine lukewarm "holds" and one "strong sell" rating.

This cautious outlook is not unfounded, as GME has surrendered nearly 10% on a year-over-year basis, and more than 4% so far in 2012. However, the equity is on pace to finish October atop its 10-month trendline, a feat accomplished just once during the past 52 weeks. Moreover, the company is tentatively scheduled to report quarterly earnings in mid-November, and has topped consensus bottom-line estimates in three of the past four quarters. Another positive earnings turnout could create a tailwind for the security prior to December expiration, which could spell trouble for yesterday's bears.


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