Options Trade of the Day: A GameStop Corp. Married Put

By
A A A

Shares of video game retailer GameStop Corp. ( GME ) have tumbled nearly 8% so far today, after the company cut its third-quarter earnings outlook. Specifically, GME said that it now expects to earn 35 cents to 38 cents per share in the current quarter, down 3 cents per share from prior guidance. Wall Street is currently expecting a profit of 39 cents per share in the third quarter.

All was not bad for GME, however, as the firm's second-quarter earnings of 26 cents per share were in line with expectations, while full year projections for a profit of $2.58 to $2.68 per share surrounded the current consensus estimate for earnings of $2.63 per share.

Still, options traders are taking their cues from GME's sharp decline, as put volume has swollen to more than 6,000 contracts, or about 10 times the stock's average daily put volume. The most active contract is the soon-to-expire August 20 put, where some 3,900 contracts have changed hands. However, buried amid a flood of what appears to be buy-to-open activity for GME put traders is what appears to be the initiation of a bullish married put on the video game retailer.

The Anatomy of a GameStop Corp. Married Put

Breaking down this combined stock/options strategy, the trader purchased 121 GME September 18 puts for $0.46, or $46 per contract, at about 9:52 a.m. on the International Securities Exchange (ISE). At the same time, the trader purchased 12,100 GME shares (100 for each put contract purchased) for roughly $19 each. The total outlay on option position was $5,566 - ($0.46 * 100) * 121 = $5,566 -- while the total cost of the stock position was $229,900.

GME September 18 strike married put

Now, for those of you who not familiar with married puts, this strategy involves buying a stock (a long position) and buying a put (a short position), and may seem counterintuitive. However, the actual strategy behind the trade is pretty simple. Basically, the idea behind a married put is that by purchasing a put option for every 100 shares of the underlying stock, you are guaranteeing a minimum selling price for the shares should they retreat before the option contract expires. If executed properly, a trader can essentially buy a stock with no fear of losing anything more than the cost of the put contracts to insure the position. As you can see, this is a reassuring and very handy option strategy in the current market environment.

Potential Outcomes

There are several potential outcomes for this married put position. For example, let's say that GME takes a turn for the worst and is trading at $17 per share when September options expire. By exercising the August 18 put, the trader can sell his shares for $18 apiece, or $217,800 total. While the trader loses $17,700 -- ($229,900 - $217,800) - $5,566 = $17,666 -- he would have lost $24,200 -- $229,900 - $205,700 = $24,200 -- if he had not set a stop-loss by purchasing the put options as a hedge.

On the other hand, let's assume that GME rallies by the time September options expire, finishing at $21 per share. In this case, the September 18 put expires worthless, meaning that the trader forfeits the $5,566 premium paid for the married puts. However, since the GME stock position gained roughly $24,200 since the married put position was opened, the trader is still sitting on a profit of $18,634 -- ($254,100 - $229,900) - $5,566 = $18,634.

Furthermore, the trader also has the option of retaining his GME shares and repeating the process with another married put, or selling them for $21 each and exiting the position alltogether.

GME married put profit/loss chart

Wrapping Up

For those investors looking to try out this strategy, it is important to remember that by entering a married put position, you are not looking to make a profit from the purchased put option. Because you are long, or bullish, on the underlying stock, your primary objective is for the shares to rally. As such, the put purchased is only a stop-loss to insure against any unforeseen bumps in the road. And, while you'll have to forfeit the initial premium paid should the underlying stock journey higher, the cost of the "coverage" is a small price to pay to sleep a little better at night, especially in the current market conditions.

Senior Equities Analyst Andrea Kramer will be live blogging from the Schaeffer's booth at the San Francisco Money Show later this week. Click here for an advance look at what to expect at this premier investor event.



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.

All Rights Reserved. Unauthorized reproduction of any SIR publication is strictly prohibited.


This article appears in: Investing , Options

Referenced Stocks: GME

Schaeffer's Investment Research

Schaeffer's Investment Research
  • See all for Schaeffer's Investment Research
  • View Print Version

More from Schaeffer's Investment Research:

Related Videos

Stocks

Referenced

50%

Most Active by Volume

54,553,036
  • $10.59 ▲ 13.26%
47,766,815
  • $16.215 ▲ 0.78%
46,837,872
  • $103.245 ▲ 0.73%
43,777,952
  • $20.6199 ▲ 5.36%
34,569,950
  • $12.76 ▲ 9.25%
29,531,823
  • $76.4299 ▲ 2.15%
26,036,809
    $3.63 unch
25,397,168
  • $50.875 ▲ 2.26%
As of 9/2/2014, 03:36 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Search
Data Provided by BankRate.com