A Look At GameStop Options Ahead Of Q3 Results: Why This Stock Price Level Seems Important

Shares of GameStop Corp. GME closed 8.45% lower on Tuesday. The company has reportedly commenced lay-offs as it prepares to report third-quarter financial results after the market close on Wednesday.

What Happened: GameStop’s option chain of Dec. 09 expiry shows that the maximum open interest lies at the $22-strike put option, at the time of writing. Open interest is the total number of outstanding derivative contracts that have not yet been settled.

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Rationale: Despite the plunge in share price, a large OI build at the $22 strike is an indication that professional options traders consider the level to be protected till Friday when the option expires. In other words, this indicates a majority of traders believe the stock has short-term support at this level.

How To Trade: Had it been any other stock, it would have made sense to follow smart money direction and deploy a ‘Bull Put Spread’ where the $22 put could be shorted with the simultaneous purchase of the $21.5 put to receive a net credit. This would have resulted in a net profit if the stock stayed at or above the $22 mark by Friday.

However, since GameStop stock has a history of defying Wall Street expectations, it would be prudent to avoid deploying a directional strategy. Despite high volatility, which leads to higher option prices, it would make sense to consider a ‘Long Strangle’ strategy that includes buying a slightly out-of-the-money call and put options with the same expiry.

Given the current stock price level of about $23.5, one of the prudent ways of executing this strategy involves buying the $24.5 call option at about $0.93 while also buying the $22.5 put option at close to $0.82. This would include a net debit of $1.75.

If GME shares move significantly in either direction on Thursday, the respective option would also follow suit and explode in value, covering the loss made by the other leg of the strategy while also possibly registering a decent profit. In case the stock does not make any significant moves, closing both positions at the earliest would make sense in order to avoid further losses as a drop in volatility coupled with ‘theta decay’ could lead to a decline in the option prices.

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