Call Traders Go Wild as GameStop Corp. (GME) Nears Lows

GameStop Corp. (GME) is failing to capitalize on rumors of a potential investor stake

by Alex Eppstein

Published on Oct 17, 2016 at 1:51 PM

According to Trade-Alert, options traders are flocking to GameStop Corp. (NYSE:GME) due to rumors of a possible investor stake. Yet, the stock is failing to capitalize on the buzz, last seen 2% lower at $24.86 -- and a stone's throw from its three year-low of $24.33.

As alluded to, options activity is running hot, particularly on the call side of the aisle. Digging in, 11,000 GME calls have been exchanged, or seven times the expected intraday rate. The most active strike by a mile is the out-of-the-money October 26 call, where fresh positions are being opened. However, it's unclear whether the bulk of the contracts are being purchased or sold. For potential buyers, the goal is for GME to rally past $26 by this Friday's close, when the series expires, whereas potential sellers expect the strike to act as a short-term ceiling.

It's currently an attractive time to purchase premium on short-term GME options, too -- whether puts or calls. After all, the stock's Schaeffer's Volatility Index (SVI) of 36% ranks in the low 14th annual percentile, hinting at relatively muted volatility expectations at the moment. Meanwhile, the GameStop's Schaeffer's Volatility Scorecard (SVS) of 83 suggests the options market has tended to underprice the shares' ability to make outsized moves in the past year.

Elsewhere on the Street, sentiment is pretty mixed. On the bearish side are short sellers, whose pessimistic bets account for over 29% of GME's float. At the stock's average trading rate, it would take more than three weeks for these positions to be covered. On the bullish side, 90% of analysts rate the shares a "buy" or better, with not a single "sell" opinion to be found.

As alluded to, though, GameStop Corp.'s (NYSE:GME) technical performance leaves much to be desired. On a year-over-year basis, the retail stock has surrendered a brow-raising 45% of its value. From a contrarian perspective, this leaves the shares vulnerable to a round of downgrades, which could lead to even more selling pressure down the road.

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