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GameStop Bears Eye Looming Resistance

GME puts have become the options of choice as third-quarter earnings approach

by 11/6/2012 3:15 PM
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Puts have become quite popular lately on GameStop Corp. (NYSE:GME - 23.96), judging by data from the major options exchanges. During the past five days, speculators have bought to open 10,632 puts and 279 calls on GME, according to the International Securities Exchange (ISE) and Chicago Board Options Exchange (CBOE). In other words, more than 38 times as many bearish bets as bullish have been purchased on the stock.

This bearishly slanted option volume has been a growing trend for GME. The shares have now racked up a 10-day put/call volume ratio of 8.73 on the ISE, CBOE, and NASDAQ OMX PHLX (PHLX), confirming a strong preference for puts over calls in recent weeks. In fact, this ratio arrives in the 99th percentile of its annual range, as speculative investors have rarely shown a healthier appetite for bearish options.

Short sellers also maintain a sizable stake in GME, with 36.5% of the equity's float sold short. This hefty supply of shorted shares represents 14 times the stock's average daily trading volume.

This rising tide of negativity precedes GME's upcoming earnings report. The company is due to confess its third-quarter results before the market opens next Thursday, Nov. 15, and analysts are looking for a profit of 33 cents per share -- down slightly from last year's earnings of 39 cents per share. In its last four quarterly reports, GME has surpassed consensus profit estimates on three occasions.

On the charts, GME is off 1.7% year-to-date. The stock has recovered from its summertime lows near the $16 level, but the $24-$26 area has served as a reliable roadblock throughout the past year.

 Daily Chart of GME since November 2011


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