Wednesday, August 17, 2011

GameStop (GME) - Earnings Preview and Patterns

GME is trading $20.51, down 4.1% with IV30™ up 13.7%. The LIVEVOL® Pro Summary is below.


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GameStop Corp. (GameStop) is a multichannel retailer of video game products and personal computer (PC) entertainment software.

The company has earnings due out tomorrow BMO -- so today is the last day to trade before the report and the vol is up with active options. GME has traded over 15,000 contracts on total daily average option volume of just 4,451. The action has been in the Aug 20 puts, Aug 22 calls, and Aug 21 calls, respectively. They all look like substantially purchases. The Stats Tab and Day's biggest trades snapshots are included (below).

The Options Tab (below) illustrates that the Aug 22 calls are mostly opening (compare OI to trade size). The Sep 23 calls have traded nearly 1,900 on small OI as well.

Let's look at some earnings stats for GME from the last eight quarters, below.

The final column illustrates the results. In seven out of the last eight earnings cycles selling the one day ATM straddle has been a winner with a sale the day before earnings and a purchase the day after. The largest absolute move in the straddle value was, however, the one time the straddle was a purchase.

Let's turn to the Skew Tab snap (below) to examine the vols by strike by month.

We can see the elevated vol in the front which is normal given that earnings are out tomorrow. The front month shows a parabolic skew reflecting both upside and downside risk, whereas the back months look more normal (ish), with the downside priced higher than the upside (in terms of vol).

Finally, the Charts Tab (6 months) is below. The top portion is the stock price, the bottom is the vol (IV30™ - red vs HV20 - blue vs HV180 - pink).

We can see that the implied generally trades above the realized vol, or so it has for the last six months. Interestingly, the implied is lower now than it was on 8-8-2011 (IV30™ was 55.97 which is the 52 wk. high).

Possible Trades to Analyze
The front month is pure earnings vol at this point, so any trade that buys or sells that vol is firmly embedded in some type of earnings bet. Having said that, let's look at some possible trades to examine keeping the 7/8 trend from previous earnings results with respect to the ATM straddle.

1. For bulls:
An interesting position could be owning the Sep 21 calls for ~52 vol against a sale of the Aug 22 calls @ ~114 vol. That spread costs less than $1.00, so an upside spike would be a winner. Certainly an earnings release that pushes the stock down hard would hurt that trade.

2. For bears:
Owning the Sep 20 puts for ~53 vol against a sale of the Aug 19 puts @ ~122 vol, also costs less than $1, so a big move down down (or small move down) is likely a winner. A move up, especially a large one, could turn that into a loser.

3. For delta neutral:
An interesting trade could be a sale of the Aug 20/21 strangle @ ~115 vol against a purchase of the Sep 20/21 strangle for ~52 vol. There is some risk here of course that the stock gaps one way or the other. That would leave this trade a loser. Certainly wider strangles are also worth examining and have slightly different PnL ranges and risks.

All three of the trades above bet on a relatively small moves for the stock. A perfectly reasonable (and contrarian) approach would be to bet on a large move given the state of the market as a whole. That may mean owning that vol in Aug as opposed to selling it.

This is trade analysis, not a recommendation.

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