Monday, September 26, 2011

GameStop (GME) - Elevated Vol

GME is trading $22.89, up 1.7% with IV30™ down 0.6%. The LIVEVOL® Pro Summary is included below.


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

I found this stock using the real-time custom scan that searches for high vols relative to the short-term and long-term historical realized vol.

Custom Scan Details
Stock Price GTE $7 and LTE $70
IV30™ - HV20 LTE 10
HV180 - IV30™ LTE -8
Average Option Volume GTE 1,200
Industry isNot Bio-tech
Days After Earnings GTE 10 and LTE 60

The goal with this scan is to identify short-term implied vol (IV30™) that is elevated both to the recent stock movement (HV20) and the long term trend in stock movement (HV180). I'm also looking for a reasonable amount of liquidity in the options (thus the minimum average option volume), want to avoid bio-techs (and their crazy vol) and make sure I'm not selling elevated IV30™ simply because earnings are approaching.

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

On the stock side we can see on both of the last two earnings releases, the stock dipped on that trading day but ultimately rose after. On the vol side we can see that the implied has elevated and held as the realized vol (short-term) has decreased. It's that recent divergence that has opened the vol diff. Specifically:

IV30™: 48.41
HV20: 36.74
HV180: 31.11

Let's turn tot he Skew Tab, below.

The skew shape looks normal. The Nov options are elevated to Oct likely b/c earnings may be due out at the end of the Nov cycle. There aren't any obvious kinks in the front two months to trade.

Let's look to the Options Tab (below) for completeness.

Possible Trades to Analyze
1. Vol sales:
a) The Oct 23 straddle is priced at ~46.5 vol or ~$2.35. Covering that sale with the Oct 19/25 strangle yields a ~$1.70 credit or a MaxGain:MaxLoss of 1.3:1

b) Similar approaches with further OTM strangles are interesting to examine, maybe even including as far out as a sale of the Oct 19/25 strangle covered with Oct 18/26 strangle.

c) Going 1x2 (owning meat and selling 2 wings) is also an interesting position to examine, particularly to the downside given that the GME 52 wk range is [$17.93, $28.66].

2. Vol purchases
A volatile market in a retail name ahead of potential pre-holiday forecasts -- I dunno, maybe less than 50 vol is a purchase?...

This is trade analysis, not a recommendation.

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