Shares of video game retailer GameStop Corp. (
) 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
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.
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.
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.
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
for an advance look at what to expect at this premier investor
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