GameStop bull bets on upside replay


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.

GME 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 games online.

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 announced.

(Chart courtesy of tradeMONSTER)

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

Copyright © 2010 OptionMonster® Holdings, Inc. All Rights Reserved.

This article appears in: Investing , Options

Referenced Stocks: GME



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