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Option investors position for gains in GameStop
February 10, 2011 / 10:25 PM / 7 years ago

Option investors position for gains in GameStop

CHICAGO/NEW YORK (Reuters) - Traders snapped up bullish options in video game retailer GameStop Corp (GME.N) on Thursday, positioning for gains in the weeks ahead.

GameStop shares rose and its options volume surged on several factors, including renewed takeover speculation and upcoming earnings next month.

On the New York Stock Exchange, the stock closed up 3.4 percent at $20.37.

“This stock has been completely left out of the rally since early 2009,” said David Russell, an analyst at Web information site optionMonster.com. “We have seen a trend of investors bottom-fishing for beaten-down stocks such as GameStop that could also start to rally.”

In another development, GameStop eliminated several of its senior executives’ rights to end their employment agreements, including those of Chief Executive Paul Raines, President Tony Bartel and Chief Financial Officer Robert Lloyd, according to a regulatory filing released late on Wednesday.

Morningstar analyst R.J. Hottovy said this sparked takeover rumors about GameStop similar to ones that surfaced in late December, when Office Depot also changed its executives’ employment agreements, which lifted its shares.

“It speculates that their senior executives are looking for increased personal security if a potential takeover is threatened or pending,” Hottovy said, referring to the employment agreements. Analysts have long viewed GameStop as a takeover target.

GameStop said it does not comment on speculation.

The stock also has a lot of short interest. It is a candidate for a potential short squeeze because if it does not go down more, the shorts will be forced to buy the shares, Russell said.

A short squeeze occurs when the price of a stock rises and investors who sold it short rush to buy it to cover their short positions and cut their losses.

Gamestop’s short interest ranks in the top 10 percent of stocks in Thomson Reuters StarMine’s database of about 4,800 issues.

In the options market, a flurry of call option activity drove up volume and volatility.

In all, about 29,000 calls and 3,791 puts changed hands, or 5.7 times greater than the average daily volume. Directional sentiment based on order flow was 60 percent bullish, according to options analytics firm Trade Alert.

“It does look like option investors are taking bullish positions in GameStop,” said Interactive Brokers Group equity options analyst Caitlin Duffy. “Call buyers are picking up in- and out-of-the-money calls across several expiration months, positioning for an uptrend to gain momentum.”

Investors often turn to equity call options, which convey the right to buy a stock at a fixed price at any time until expiration, to speculate on potential share price appreciation, while puts give the right to sell the stock at a preset price.

Trading was heavy in the March $20 and $22 strike calls. “These call options could also be a way to take bullish stances ahead of earnings expected on March 17,” Duffy said.

Reporting by Doris Frankel and Liana B. Baker; Editing by Dan Grebler

Our Standards:The Thomson Reuters Trust Principles.
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