A Look at GameStop Alternatives Ahead of Q3 Results: Why This Stock Price Level Looks Important – GameStop (NYSE:GME)

shares of gamestop corp gme It had closed down 8.45% on Tuesday. The company has reportedly begun lay-offs as it prepares to report third-quarter financial results After the market closes on Wednesday.

What happened: GameStop’s December 09 expiration options series shows that at the time of writing maximum open interest is on the $22-strike put option. Open interest is the total number of outstanding derivative contracts that have not yet been settled.

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Justification: Despite the drop in share price, a large OI at the 22 strike is a sign that professional options traders consider the level safe until Friday, when the option expires. In other words, it indicates that most traders believe that the stock holds short-term support at this level.

How to trade: If this were any other stock, it would make sense to follow the smart money direction and deploy a ‘Bull Put Spread’ Wherein the $22 put can be shorted with the simultaneous purchase of the $21.5 put to obtain short credit. If the stock remains at or above the $22 mark by Friday, it will result in a net profit.

However, since GameStop stock has a history of defying Wall Street’s expectations, it would be prudent to refrain from implementing a directional strategy. Despite the high volatility, which leads to higher option prices, it would be prudent to consider ‘The Long Strangle’ strategy that involves buying slightly out-of-the-money calls and puts alternative with the same ending.

Given the current stock price level of around $23.5, one prudent way to execute this strategy involves buying the $24.5 call option at $0.93, while also buying the $22.5 put option at $0.82. . This would involve a net debit of $1.75.

If GME shares move significantly in either direction on Thursday, the corresponding option will follow suit and explode in value, possibly even recording a nice profit while covering the losses incurred by the second leg of the strategy. If the stock does not make any significant move, it would be prudent to close both the positions at the earliest to avoid further losses as ‘theta decay’ coupled with fall in volatility may cause a fall in option prices.

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