Gamestop Earnings Play TL;DR
- GME 03/28 25C for $0.35 or less
- GME 03/28 14.5/15 Strangle for $3.20 or less combined
Trading Thesis - How these plays can make you money
Gamestop earnings tend to have massive increases in implied volatility as an aftershock of the events of January, 2021.
That increase in implied volatility (IV) implies that deep out of the money calls can be traded profitably.
In the past, IV has increased as much as 300%. And when multiplied by the vega, and subtracing the estimated theta, results in the option contract doubling in value.
Currently, the vega is 0.007 and theta 0.048 for the GME 03/28 25C. There are currently 14 days until the earnings call. So assume -0.672 of value due to theta. The IV in turn needs to increase by 96 in order to overcome theta. Past earnings run-ups have shown IV increasing in excess of 200 points. So the excess 104 points of IV represents about $0.728 of incremental value due to IV expansion.
From a position sizing standpoint, I intend to open twice as many strangles as deep out-of-the-money (DOOTM) calls. The intent is for the gains of the strangle to overcome the potential losses of the DOOTM Calls.
Notes - Something to give you a new wrinkle
- If the price has moved past the entry price, exercise caution. Something changed between the time these plays were generated and market open.
- Look to sell half your position on a double, and freeroll the rest to exit at your discretion.
- I tend to risk up to 1% of my total capital on any trades I take. If my conviction is lower, I’ll only allocate 0.5% or even 0.25% of my capital to the trade, and dollar cost average in.
- The trades were calculated before market open, and so are based on information up to yesterday. Keep that in mind when deciding to enter well after the fact. New price movement may invalidate the original thesis.
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