Benchmark Issues Bruising Note After GameStop Earnings

Options traders were unusually bearish ahead of earnings

Nov 30, 2018 at 9:37 AM
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The shares of GameStop Corp. (NYSE:GME) have plummeted out of the gate after the video game retailer's quarterly earnings report. A round of bearish brokerage notes is only strengthening the headwinds, with GME stock down 9.1% to trade at $13.30, flirting with its worst day since Aug. 27, when it plunged 11.1%.

Looking closer at earnings, GameStop reported a third-quarter adjusted profit beat of 67 cents per share, and said same-store sales rose 2.1% in the three-month period. However, the company also cut its full-year and current-quarter earnings forecasts, with Chief Financial Officer Rob Lloyd citing "weakness in pre-owned and recent sales promotions." GME also said it will not bring on a new CEO until it wraps up its strategic review.

Three analysts have since cut their price targets on the GME stock, with Benchmark setting the lowest bar at $9. The brokerage firm said GameStop " has become irrelevant  in the video game market," and that it has "zero terminal value." More generally, analysts have been split on the equity, with three maintaining a "strong buy," compared to three "holds," and one "strong sell."

Options traders on the other hand have quickly picked up the pace of put buying relative to call buying in recent weeks. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), GME's 10-day put/call volume ratio of 5.21 ranks in the 93rd annual percentile.

Drilling down, the January 2019 14-strike put saw the biggest increase in open interest over this time frame, with 14,705 contracts added. Trade-Alert indicates the bulk of this activity occurred this past Tuesday, Nov. 27, when a number of positions were bought to open. The closing ask price of this option on Tuesday was $1.41, which makes breakeven for the put buyers $12.59 (strike less premium paid).

On the charts, GME stock had been climbing back from its 13-year low at $12.14, tagged on Nov. 20, and gapped 11.6% higher that next day on news the company is selling its Spring Mobile division. However, the equity's 80-day moving average quickly emerged as resistance. The shares could be headed for bigger losses, too, considering GameStop has been one of the worst-performing stocks on the S&P 500 Index (SPX) during the holiday season.

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