The GameStop Corp. app.
Tiffany Hagler-Geard/BloombergThinking of betting against GameStop ? It won’t be easy to do it safely.
The prospect is tempting, given its run-up this month. The stock finished Friday at $325, up $131.40, or 68% on the day, while earlier this month it was around $18.
Given the high risks and difficulty in shorting the highflying stock, investors have gravitated towards the options market. The problem is that GameStop put options are very expensive, which can make it hard to profit on them.
At the same time, it can be difficult to trade GameStop options. Some firms are restricting their clients’ ability to initiate new positions.
One measure of the cost of the GameStop options, implied volatility, stands at an off-the-charts 600%. That’s a reading rarely reached on any stock option. Implied volatility on options on Tesla (TSLA), whose shares can swing sharply, is about 75%. The measure stands at around 20% for the S&P 500.
Investors would need GameStock stock to fall a lot before the put option expiration in order to profit, but holders could also cash in with a gain if the shares fall before expiration and the puts rise in value. One risk of owning the puts is a drop in implied volatility, which would reduce their value.
At midafternoon Friday, the GameStop puts with a strike price of $290 and an expiration on Feb. 19 traded around $158, meaning the stock would have to fall to $132 ($290 minus $158) for the holder to break even if the puts are held to maturity.
The less expensive Feb. 19 puts with a strike price of $125 were trading around $51, while $100 strike puts were at $35. The puts allow investors to sell GameStop shares at a fixed price. Each put option contract covers 100 shares.
GameStop put volume has been high in recent days as investors favored the puts as a way to bet against the stock. Some 1.2 million puts on GameStop traded on Wednesday.
Write to Andrew Bary at andrew.bary@barrons.com
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January 31, 2021 at 06:30PM
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