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GameStop Corp. (GME) Bull Bets on Short-Term Gains

Block of 5,000 calls traded at GME's June 36 strike

by 6/5/2013 2:13 PM
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GameStop Corp. (NYSE:GME) -- currently docked at $34.62 -- has had an impressive run on the charts, climbing 76.6% year-over-year and 42% within the past three months. Moreover, the video game retailer reached a new multi-year high of $39.87 on May 17, and speculators have subsequently been snatching up more calls than puts as of late. According to GME's International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) 10-day call/put volume ratio of 1.57, speculators have bought to open roughly 1.5 calls for every put during the past two weeks.

Likewise, in today's options pits for GME, more than 7,300 calls have changed hands, compared to only 1,064 puts. Most of this traffic passed through the June 36 call, where a block of 5,000 contracts went off at the ask price of $1.30, suggesting it was purchased. Furthermore, implied volatility is increasing, and volume exceeds open interest, pointing to buy-to-open activity.

The call buyer will profit from the play if GME trots north of the breakeven price of $37.30 (strike price plus the ask price) -- territory last reached on May 22 -- by the close on June 21, when front-month options expire. If, however, GME lingers below the 36 strike, the call buyer risks losing the initial premium paid, should he hold onto the call until it expires.

Jumping outside the options pits, short interest accounts for 29.6% of GME's float, implying that many speculators are actually pessimistic about the stock. Therefore, it is possible that the heavy call activity is a result of short sellers buying calls to hedge their bearish bets.

Still, bullish appraisal for GME is high among the brokerage bunch. Of the 15 analysts weighing in on the stock, nine endorse it as a "strong buy," while five maintain a "hold" rating, and only one considers it a "strong sell."


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