GameStop (GME) stock jumped 134% yesterday as option volume continues to go through the roof.
The “wallstreetbets” Reddit crowd have really ramped this stock through aggressive call option buying which is putting huge amounts of pressure on other market participants.
However, yesterday’s action saw only 22% of the option volume in the calls and 78% in the puts. So perhaps the crazy rally is coming to an end?
The stocks with the highest option volume yesterday were as follows:
Nokia (NOK) — 92% calls
GameStop — 22% Calls
AMC Entertainment (AMC) — 61% calls
Palantir Technologies (PLTR) — 72% calls
BlackBerry (BB) — 78% calls
All over these stocks traded over 1 million contracts.
GME stock was the only one among that list that traded less calls than puts which I thought was interesting.
Implied volatility has also gone through the roof on some of these names:
NOK — 362%
GME — 511%
AMC — 569%
PLTR — 165%
BB — 455%
This is not the sort of thing you see every day and trading in these names is more akin to gambling than investing.
GME Stock Calendar Spread Exploits Volatility Decay
One trade I thought would be interesting to look at is a bearish calendar spread on GME stock.
Selling the Feb. 19 50 put option will generate around $1,140 in premium and buying the Nov. 19 50 put will cost around $2,675.
That results in a net cost for the trade of $1,535 per spread and that is the most the trade can lose.
The idea with the trade is that the February put will decay at a faster rate than the November put.
If the February 50 strike put expires worthless, we can sell a March 50 put and continue on like that to continue offsetting the cost of the November long put.
It’s hard to know what’s going to happen from here and sometimes the best thing to do is just sit on the sidelines, grab some popcorn and watch the action unfold.
Be careful out there.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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