GameStop Options Traders Call a Top After Burry Goes Long

Michael Burry's hedge fund revealed a stake in GME

Managing Editor
Aug 22, 2019 at 12:13 PM
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There hasn't been much to write home about for GameStop Corp. (NYSE:GME). Today, though, the stock is up 7.6% to trade at $3.88, after Barron's reported hedge fund manager Michael Burry -- whose famous bet against subprime mortgages ahead of the 2008 housing crisis was featured in the movie "The Big Short"  -- just went long on GME stock.

Scion Asset Management took a 3.3% stake in GME, and encouraged the company to buy back its shares. Burry said the video game retailer's balance sheet "checks out," and the share price should be higher given the company's cash flow. Against this backdrop, GME options traders have come out in droves today.

So far, roughly 25,000 options have crossed the tape, nine times the typical intraday amount, and volume pacing in the 99th annual percentile. Most of the attention is centered at the January 2021 5-strike put, but there are also new positions being opened at the weekly 8/23 4-strike call. It looks like traders may be selling the calls, betting on the strike to serve as a short-term ceiling through the close tomorrow, Aug. 23.

It's been a free fall for GameStop stock, which was trading around $21 just two years ago. But today, GME is heading toward its fifth straight win, on track to close atop its 20-day moving average for just the second time since mid-March. The shares bottomed at $3.15 back on Aug. 15, and even amid this recent hot streak, have still shed 70% year-to-date. 

Daily Stock Chart GME

It's no surprise that there's a tremendous amount of pessimism surrounding the equity. While short interest fell 14.5% in the most recent reporting period, roughly 57% of GME's total available float is sold short, or 9.1 times the average daily trading volume. 

And over in the options pits, the stock's 10-day put/call volume ratio of 3.92 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) ranks in the 90th percentile of its annual range. So, not only have long puts nearly quadrupled the number of long calls in the last two weeks, but the rate of put buying relative to call buying has been quicker than usual.

Echoing this sentiment is the security's Schaeffer's put/call open interest ratio (SOIR) of 1.68, which also ranks in the 90th percentile of its annual range. This indicates near-term traders have rarely been more put-biased toward the video game retailer.


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