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GameStop Corp (GME) Call Options Active Ahead of Earnings

GME shorts could be hedging with out-of-the-money calls

by 3/25/2013 10:12 AM
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Videogame maker GameStop Corp. (NYSE:GME - 25.93) will take the earnings stage later this week, and option traders are showing a relatively rare affinity for calls. During the course of Friday's session, GME saw roughly 10,000 of these bullish bets change hands, more than tripling its average daily call volume. For comparison, fewer than 1,500 GME puts were exchanged, well below the norm.

Most popular by a mile was the May 29 call, which saw 6,330 contracts cross the tape. A block of nearly 4,350 contracts traded at the ask price of $0.76, suggesting they were bought, and open interest skyrocketed over the weekend, pointing to newly added bullish positions.

By purchasing the out-of-the-money calls to open, the buyers have one of two motives: to profit from a rally to multi-year highs, or to protect a short stock position. In the case of the former, the buyers will make money if GameStop conquers the $29.76 level (strike price plus premium paid) -- in territory not charted since May 2009 -- within the next couple of months. In the case of the latter, the shorts are locking in an acceptable price at which to repurchase the shares ($29), should GME soar in the near future.

Underscoring our theory of potential hedging, short interest jumped 10.2% during the past month, and now accounts for more than 36% of GME's total available float. In fact, at the security's average pace of trading, it would take more than three weeks to repurchase all of these bearish bets.

Whatever the motive, Friday's appetite for short-term calls marks a change of pace among the options crowd. GameStop Corp.'s Schaeffer's put/call open interest ratio (SOIR) of 1.13 ranks in the 77th percentile of its annual range, suggesting near-term options players are more put-heavy than usual right now.

Elsewhere on Wall Street, though, not everyone has capitulated to the bearish camp. Despite underperforming the broader S&P 500 Index (SPX) by 6 percentage points during the past three months, GME still boasts nine "strong buy" ratings from analysts, compared to six lukewarm "holds" and just one "sell" or worse suggestion. Should GameStop report weaker-than-expected earnings on March 28, a round of downgrades could exacerbate selling pressure on the underperformer.

Technically speaking, GME has spent the past few years stagnating between support in the $18 region and resistance in the $26-$27 neighborhood. What's more, the equity is staring up at its 80-month moving average, which has rejected nearly all of GME's rally attempts since late 2009.

Monthly Chart of GME since May 2009 With 80-Month Moving Average


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