Today in GameStop Options
GameStop is down slightly today, partly due to the company’s plan to issue $1 billion in new shares. While this is likely good news for the company in the long-term, a stock sale would dilute existing shareholders in the short-term.
Many have been calling for GameStop to issue new shares for months since the short squeeze started. Generally, companies want to issue new shares to fund expansion plans when the stock is valued relatively highly. Conversely, companies would want to buy back their own shares when the stock is undervalued.
Options for GameStop have cooled off considerably today. Implied volatility (IV) for GameStop options are down to about 150% for near-the-money calls and puts. This is still pretty high, but much less than the 300% to 400% IV levels we saw last week.
Lower IV means that the options market is not pricing in as sharp of a move in GameStop as it was last week.
How to Trade The Situation
In my opinion, this would be a good time to sell premium on GameStop options. Typically, you don’t want to sell premium when IVs are outrageously high. Even though premiums are very high and can be profitable, IVs in the 400%+ range signify that a large move likely is coming, and you could be washed out.
Now that IVs are in a more manageable range, it could be a good time to sell premium on out-of-the-money calls and puts. The market seems to expect less action in GME this week, so it may be a good time to profit off of theta decay while the price action calms down a bit.
Take a look at the $220 call expiring on April 9th. The last 10 days would have been horrible times to buy this call. IV was extremely high, so traders were way overpaying for this call.
Buying a call for $45 that was $40 out-of-the-money implied a 44% move just to break-even. In other words, GameStop would have to go up 44% in just two weeks for a trader to break even, assuming they bought near the top on the chart above.
This is why it’s so hard to make money buying calls on high IV stocks. Even if the stock continues to rocket upwards, you’ll probably still lose because of the massive premium you paid to get in. Even though GameStop went up on several of the days on this chart, the option lost value almost every single day.
The $220 calls are still fairly far out of the money, and could be good options to sell. Remember to always keep a tight stop loss when selling calls on names like GameStop, AMC, and Tesla; you could easily lose more than 100% in a matter of minutes.