Puts Pop on GameStop Stock After Earnings Slump

Shorts may have been hedging their GME bets with calls ahead of earnings

Managing Editor
Sep 10, 2018 at 3:23 PM
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Shares of GameStop Corp. (NYSE:GME) are down 0.4% at $16.07, with the stock finding its footing after a volatile session last Friday following the company's fiscal second-quarter earnings miss.The gaming retailer also said it's working with advisors on the possibility of going private or selling the company. Post-event, GME puts were popping, marking a change of pace for the retail stock.

On Friday, traders on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) bought to open 2,138 puts and 712 calls on GameStop stock, with bearish bets tripling their bullish counterparts. This was a deviation from the retailer's recent trend, as GME's 10-day ISE/CBOE/PHLX call/put volume ratio of 2.78 ranks in the 83rd annual percentile. Contrary to Friday's put surge, this lofty ratio suggests calls were bought to open over puts at a faster-than-usual clip during the past two weeks.

However, short interest currently represents almost 40% of the stock's total available float. At GameStop's average daily trading volume, it would take more than three weeks for shorts to cover all of these bearish bets. As such, some of that buy-to-open call volume in the two weeks leading up to earnings may have been related to short sellers hedging their bets ahead of the event.

A broader look at the charts confirms that there's not much justification to bet bullishly on the shares just yet. GME has moved slowly higher off its second-quarter lows around $12.50, but a late-August rally attempt was thwarted by its falling 320-day moving average -- a trendline that has collaborated with its 200-day counterpart to highlight the equity's long-term downtrend for over two years. The retail stock has shed 10% year-to-date.

Daily Chart of GME with 320MA

 

 

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