GameStop Corp. (GME), Trending Stock Report

WOW! Who would have thought GameStop Corp. (GME) would have a positive earnings report today? The meme stock just keeps surprising. Here are some of the headlines since the news broke…

What does this mean for options traders? Is there an option trade with an edge? It looks like there may be another opportunity for a limited-risk, high-probability trade. Let’s have a look at the reasons why. Last week we mentioned a similar opportunity ahead of earnings. Looking at the data from yesterday’s close, we can see on page 3 that volatility expectations were extreme! The recent pattern around earnings is for the stock to rise ahead of earnings then drop after earnings with a collapse in short-term volatility expectations. With the surprise profit, the stock is rising in pre-open trading, but not by a lot. We expect that short-term implied volatility will get crushed now that earnings results are known. Our favorite high-probability strategy is designed to profit from falling volatility.

This Volatility Term Structure chart shows the implied volatility of the at-the-money options for each expiration. This chart tells us that volatility expectations at yesterday’s close were extreme relative to other expirations. On 9/10/24, the day of the last earnings report, options expiring on the Friday after the report had implied volatility expectations of 202.12. On 9/11/24, the day after the report, the volatility expectations fell to 89.85. That is the definition of a volatility crush. We expect the same type of crush again in short-term GME options now that earnings are known.

This MDM graph compares the modeled expected distribution for future stock prices (the orange line) with the actual distribution of GME’s prices this year (the blue histogram). The modeled expectations and the actual distribution look very different. Yesterday’s options prices expect much larger moves than the stock’s history warranted. This graph tells us that the closing options prices last night were mispriced on the expensive side. Now that the earnings results are known, we expect options prices to collapse in the volatility crush. Prices may drop quickly in this morning’s action. However, prices were so ridiculously high yesterday, that we may still be able to sell options at a high price even as volatility expectations are getting crushed throughout the day.

GME earnings are out, and they were surprisingly good. Extreme options prices at yesterday’s close are likely going to get crushed. We may be able to take advantage of the falling volatility expectations using a short-term, limited-risk, high-probability strategy. It is critical that we use discipline with our strategy. We must get the right price when we place this type of trade!

To get the specific details and prices on today’s trade ideas, be sure to read today’s ODDS Online Daily Option Trade Idea.