Specialty retail name GameStop Corp. (NYSE:GME) is atop the OptionsHouse Hotlist today as a number of strikes have seen large blocks change hands. It appears as though an investor is rolling out of an existing front-month call spread and buying an intermediate-term bull call spread and selling a later-dated out-of-the-money put in order to finance the purchase.
The details are as follows: around 11:30 a.m. Eastern Time, blocks of 3,000 contracts traded on five different strikes. The active strikes were the October 20 and 24 calls, the April 16 put, and the April 20 and 24 calls. Based on floor data (and existing open interest levels), it looks as though the October 20/24 call spread was sold to close for 36 cents, the April put was sold to open for 81 cents, and the April 20/24 call spread was bought to open for $1.41 (buying the 20 strike, selling the 24 strike). The net debit for the five-legged transaction, when all was said and done, was 24 cents.
Assuming the October spread was traded to close, this leaves the trader short one put and long one call spread for a net debit of 60 cents. Gains for this strategy peak at expiration if GME is trading above $24. The maximum profit is $3.40 per strategy, which is the difference between the 20 and 24 strikes less the net debit (without the October sale) of 60 cents.
Gains begin to deteriorate until breakeven at $20.60 (the long strike plus the debit paid). Between the long call strike and the put strike, losses are capped at the 60-cent debit paid. Below the 16 strike, however, you are long 100 deltas because the put is in-the-money while the calls both expire worthless. The risk at this point is the same as a long stock (vulnerable down to zero). The chart below illustrates the profit and loss points of this trade (build your own charts and experiment with different price points in a virtual trading account).
This is a moderately bullish strategy, as the investor is expecting upside but using the short put to offset the cost of the call spread. The trader may not expect GME to rally much more than 20% by April (from its current level to $24) but he also doesn't expect it to fall 20% (in order to breach the 16 mark).
GME is down nearly 10% on a year-to-date basis but has been moving slowly higher over the past few weeks. The company has been a frequent topic of takeover speculation for more than a year but there has been nothing officially announced by the company to support these rumors.
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