Trade Update – Gamestop (GME): Covering Short Put, Leave Long Put

by CC August 17, 2012 10:13 am • Commentary

Trade Update: Fri Aug 17th

GME has caught a bid on its earnings and dividend raise. We’re going to take this opportunity to close the Oct 13 puts at .10 (originally sold at .43) There’s no reason to leave those open as 10c is not enough premium to wait around for. This leaves the Oct 17 puts. We’ll look to close or spread those puts on any weakness in the stock.




Trade Update: Tues Aug 15th

GME reports tomorrow morning (usually around 8:30am ET.) We’ve been sitting on a bearish play in the name for a few months. Our cost for the Oct 17/13 put spread is 1.00. It is currently trading around 1.30. We picked October because it was more of a long term story of a broken business model rather than any sort of near term catalyst play. With ideas like this, you unfortunately do have to carry the position through near term catalysts if you want to play for the longer term thesis. We’re going to stick with this one through this event, which clearly puts at risk our small gains in the structure so far. It’s understandable that some would not want to take that risk and close the position for a small gain and look to re-enter after more is known. We even looked at some ideas of protection like covering the 13 puts and selling August puts at high volatility to cover some premium/volatility risk but didn’t like giving up potential rewards if GME were to continue to move to the downside on its report. Volatility has ticked up into the earnings, which means the Oct spread is worth more that it will be tomorrow if the stock was in the same place. If the stock was significantly lower that the 17 strike following earnings and a vol collapse the opposite would be true. So we’re sticking with this one, and hoping there are no surprises to the upside tomorrow morning. If the stock were to make a big move into the close we could re-assess. Here’s a preview from Bloomberg:


PREVIEW GameStop 2Q: Watch Console Cycle, Capital Return

2012-08-15 16:38:30.905 GMT


By Brian Welcher

Aug. 15 (Bloomberg) — GameStop’s outlook on next

generation console rollouts, capital return to shareholders will

be in focus.



* 2Q adj. EPS 16c, range 10c-29c

* 2Q rev. $1.596b, range $1.44b-$1.72b

* Saw 2Q comps down 5% to down 11% on May 17

* 3Q EPS 41c; rev. $1.88b

* Yr EPS $3.13, saw $3.10-$3.30 on May 17; rev. $9.24b; saw Yr

comps flat to down 5%



* Color on progression into new console cycle; mgmt said on

call industry at end of present console cycle

* Had $455m remaining under existing authorization on May 17

* Shares don’t reflect coming console cycle, potential for

more aggressive return of capital, says Robert Baird’s Colin


* Aug. 9: GameStop would be “successful” LBO: Janney Capital



* Implied 1-day move 14.95%; fell 5 of last 8 earnings days

* GME down 28% YTD vs S&P 500 Consumer. Disc. up 15%

* Technicals: GME off annual low of $15.32 on Aug. 2, near 50-

DMA (17.30)l below 100-DMA (19.28), 200-DMA ($21.54)

* GME has 10 buys, 9 holds, 2 sells, avg. PT $26.54


* Reports tomorrow pre-mkt, last 4 at 8:30am, call 11am







Trade Update: Tues July 24th

With GME plowing lower since buying the outright Oct puts we’re going to take this opportunity to spread the trade by selling some downside puts.

Action: GME ($15.60) Sold to Open October 13 puts at .43


New Structure:

Long GME Oct 17/13 Put spread for 1.00




Original Post: 1:00 pm EDT – June 7, 2012 By

New Trade: Gamestop (GME) – Someone Please Cut the Lights

Living in the sprawl, dead shopping malls rise, like mountains beyond mountains.
And there’s no end in sight, I need the darkness, someone please cut the lights.   -Arcade Fire

One of our favorite long term topics here at Risk Reversal is the effect the internet is having on bricks and mortar retail. We’ve referred to the troubles at Best Buy due to its status as‘s show room. We’ve talked about about how much shopping we do ourselves online vs. the physical world. I remark that I live in an area of the country with 30 Home Depots and Targets within what seems like 30 miles. This has been covered in the media before so I won’t bore you with the details, but I would only add that I have a theory that the real estate bubble masked a serious sea-change in how we buy things. While developers were taking advantage of free money by throwing up mountains upon mountains of box stores in every new McMansion town in the exurbs, consumers were increasingly changing their shopping habits.

Of all the companies that we could pick on in this area, Gamestop is probably the one that blows our minds the most. This is a company that sells physical versions of a digital product in real estate bubble-ish suburbs and exurbs all around the country.  It just makes sense to us that Gamestop would follow its former foe Blockbuster into the abyss.

Here’s how the chart has held up over the last 5 years:

As you can see, $17 is support going back to 2008, and we think that support will be broken at some point in the next few months.

Probably the best bullish argument for GME is the fact that it has a short interest ratio of 47% of float, so almost half the shares outstanding are being shorted.  That is an obvious source of demand, which is why we’d much prefer to play this with options rather than outright shorting the shares.  We feel better when we look at the top holders of the stock:

The majority of the top holders are mutual funds, index funds, or ETF managers (like Blackrock), suggesting that the majority of its owners are “passive” investors who likely own the stock because it’s in an index or ETF that they track.  That is certainly not a vote of confidence, and that passive supply is likely to increase on any hint of bad news, like the May earnings report.

Now there will be a bunch of people talking about how GME plans to counter the obvious and continue to evolve their business model. I don’t care. As long as they are tied to all of these retail locations they will eventually be done in by the fact that video games can be downloaded digitally from home.

Timing on this trade is hard, and is probably best to time it on up days in the market like yesterday. But I can’t resist. I want to look far enough out to catch what I feel is a story that will only get worse over time. This is a trade I may even continue to roll. So here’s the trade:

New Trade: Bought GME Oct 17 puts for 1.43

We’ll look to spread this trade by selling a lower put on any downward moves in the stock, and could turn this into a long term roll situation if the stock continues to drift lower over time. This option is very thin out in October and has a delta in the 30’s. LIQUIDITY IS HORRIBLE IN THE OPTIONS. This is the type of trade where you don’t want to chase for a fill, we use limits in this sort of thing and wait for the stock to help. This will likely have up days too, and is a long term play, not a quick trade. It’s best to time it on any intra-day or intra-week strength in the stock.