GameStop has been getting pounded for months, and one trader is
looking for a rebound.
optionMONSTER's Heat Seeker tracking system detected a bullish
three-way strategy to leverage a bounce in the heavily shorted
videogame retailer. It entailed the purchase of April 20 calls for
$1.16 and the sale of April 15 puts for $0.80 and April 24 calls
for $0.28. The transaction cost a net $0.08 and involved 3,000
contracts at each strike.
If GME climbs to $24 or higher by expiration, the trader will earn
4,900 percent on his or her investment. The only way they can lose
money beyond the initial outlay is if GME falls below $15--a level
the stock hasn't broken in more than five years.
GME fell 0.27 percent to $18.27 yesterday and has been testing
support around its current level since late 2008. It attempted to
rally on Sept. 16 after management announced a $300 million stock
buyback and the pay-down of $200 million in debt, but shares
slammed into their 200-day moving average (purple line on chart)
and were driven lower again this month.
The last financial report on Aug. 19 was poor, but the company
showed signs of improvement. Book value, for instance, increased by
about $66 million year over year as cash reserves grew and debt
shrank. Gross margins also expanded by about 10 basis points.
In addition, GME cited "outstanding results" of a new
customer-loyalty program and said it's accelerating plans to sell
Valuations could attract buyers as well. The enterprise is less
than 4 times EBITDA, and the stock trades for less than 7 times
forward earnings. Short interest also represented an elevated 20
percent of the float on Sept. 30, which could fuel a rally.
Given the short interest, yesterday's bullish trade could be the
work of a bear looking to hedge against a possible rebound. It
pushed overall volume in GME to 7 times greater than average.
The date of the next earnings release hasn't yet been
(Chart courtesy of tradeMONSTER)