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GameStop (GME) stock has been treading water since its surprise profits released in late March. Nevertheless, its put option premiums have stayed high, ideal for investors who short them for income.
I discussed this opportunity in my last article on April 9, “GameStop's High Option Premiums Are Popular With Income Investors.” In that article, we pointed out that investors could short the $18.00 and $20.00 strike prices expiring on May 5 and make good income. Since GME stock closed at $20.41 on May 5, it seems that these trades worked out well for anyone who held out to the end.
For example, the $20.00 strike price puts traded at 53 cents and the $18.00 strike price puts were at 20 cents. At the time GME stock was at $22.40, so these were deep out of the money (OTM).
This also provided short investors income of 2.65% and 1.11%, respectively, based on the strike prices. And since these options expired worthless, the short investor was able to keep all this income without having to purchase the shares at these strike prices.
Short Put Opportunities Today
Today, GME stock is at $20.47, about 9% lower. But the $18.50 strike price puts at trading for 63 cents and the $18.00 strike price puts are at 48 cents per put contract. These strike prices are 9.3% and 11.76% below today's price, so they are deep out of the money.
For example, this means that if an investor secures $1,850 with their brokerage firm, they can enter in an order to “Sell to Open” one put contract at $18.50. Immediately after that, the account will receive $63.00. So, the investor makes a 3.40% yield (i.e., $63/$1,50). The $18.00 strike price offers a 2.67% premium-to-strike yield with a further OTM strike price gap.
This also means that the investor who can repeat the 2.67% short-put return each month for a year stands to make an attractive 32% return on an annualized basis.
Where This Leaves GME Stock Investors
On March 21 GameStop reported its first profit in the past two years for the quarter that ended Jan. 28. The next earnings report will likely come out in mid-June, so investors will have plenty of time to short OTM puts, as shown above, before new numbers hit.
However, if GameStop can continue to show positive free cash flow (FCF) as it did last quarter, GME stock is likely to do well. For example, its Q4 FCF was $326.6 million. That resulted in a 33% rise in its cash balance, up by $349 million.
This is the kind of operating performance that investors want to see and will likely push GME stock higher. But even if it doesn't, and GME stock treads water, that is still ideal for short-put investors.
For example, the $18.00 strike price puts present a short investor a breakeven level of $17.52 per share (i.e., $18.00-$0.48). That means the short put investor has an OTM gap of almost $3.00 (i..e, $20.47-$17.52=$2.95), which is 14.4% below the spot price. That is plenty of protection, especially given the huge yield at that strike price.
The bottom line here is that assuming GME stock treads water until its next earnings release, investors can make good income shorting OTM puts.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
