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GameStop Corp (GME) Swarmed by Option Traders Post-Earnings

One of the most popular trades is GME April 33 call

by 4/1/2013 2:46 PM
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After stunning the Street with a strong fourth-quarter showing late last week, video game retailer GameStop Corp. (NYSE:GME - 29.72) is another big mover on the markets today, as well as a hot name on the options trading floor -- with both calls and puts trading at five times their normal volumes.

One of the most popular strikes is the April 33 call, which has seen nearly 1,400 contracts change hands so far today. Volume exceeds open interest, the large majority were exchanged at the ask price, and implied volatility spiked by 6.3 percentage points -- all signs of buy-to-open activity. The volume-weighted average price (VWAP) stands at $0.24, meaning GameStop shares need to move above $33.24 (strike plus VWAP) before expiration on April 19 for the trades to be profitable. If GME doesn't break through the strike price of 33, the traders only lose the premium paid.

As stated, GME is up 6.3% today -- hitting a new 52-week intraday of high of $30.07 in the process -- as well as 18.5% on the year and 28% as compared to last April. GameStop received several upgrades and hikes to its 12-month price target from analysts this morning, further fueling the rally. This comes in the wake of last Thursday's earnings report, which saw GME grow net profits by 49% on a year-over-year basis -- the fourth straight quarter that GameStop has exceeded analysts' expectations.

Options traders remain fairly bearish on GME, however. The 10-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 1.37, and that's in the top 25% of readings over the past 12 months. That means over the last 10 sessions, puts have been bought to open at a significantly higher rate compared to the previous year. In addition, GME is a major target of short sellers -- 35.6% of GameStop's float is sold short. But that could push the stock up as it would take nearly 19 trading days for those bearish investors to unwind their stock if GME keeps climbing.


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