GME cratered yesterday, ending the day down 8% on one its largest single volume days in the past year. The move lower occurred shortly after we traded a GME options structure outlined in this morning post.
Here was the reason:
The video game world shook on Tuesday afternoon after Sony announced (along with a new Internet-based television service in the US) a streaming service called PlayStation Now at the Consumer Electronics Show. Video game retailer GameStopGME shares sank immediately following the news, as gamers considered a future without physical CDs and visits to their local store.
This is old news and the entire reason why Gamestop has over 20% in short interest. Everyone knows this is the future, it’s just a matter of how long and what GME does to survive.
We want to revisit the trade rationale for our recent trade in light of the stock’s big move yesterday. Here is what we wrote about the break-even and trade rationale:
Break-even: The ideal scenario is that GME closes at $46 on Jan18th expiry, so that the Jan short put position expires worthless, and the Feb long put position is in its sweet spot. At that point, we might look to spread the long Feb put or take it off. The put calendar will likely be profitable if GME is between 43 and 49 on Jan18th expiry (depends on what happens to Feb vol), so this is still a short-biased trade, but our upside risk is only our premium at risk of $0.70, with the thought that GME will have a hard time getting above $51, even on good news.
Rationale: The implied move for GME on next week’s sales release is around 7.5%. Since it’s clearly expected to be a big move, the calendar position could be a loser with a large move higher. We don’t want to risk losing all of our premium on one event, so we’re positioning this as a calendar, as well as the fact that we prefer the risk/reward on a structure like this rather than those simply outright short the stock. The 200 day moving average comes into play around $45, which is also where the stock recently bounced. Any move towards 46 into January expiration is the ideal spot for this structure. January vol will get crushed after the event with February only falling about 5 points or so.
There’s an old saying that we just made up – “vol begets vol.” And now that we had such a big move on a bit of news that couldn’t have been that big of a surprise, does that now mean that the event move is now more likely to be big? Maybe, maybe not.
But we do consider it a warning shot and now want to get out of the trade before the event. With the stock at about 45.20, the structure is worth about a dollar. If we can get a pop to 46 (the sweet spot on the trade) it’ll be a nice winner and probably worth taking off and pocketing the money before any big moves (the risk of this trade) take it too far away from the 46 strike. In the meantime, we’re holding on to the trade for now.