GameStop (NYSE:GME), a retailer of video games, consumer electronics, and gaming merchandise that formed the vanguard of the meme stock mania in 2021, is poised to announce its earnings for the fourth quarter of 2021 later today. Amid expectations that the company will announce a return to profitability today, the stakes for the stock’s bulls and bears could not be any higher.
How Do GameStop’s Q4 2021 Earnings Expectations Stack Up?
For the three months that ended on the 31st of December 2021, GameStop is expected to reveal $2.22 billion in revenue. (All figures are in billions of dollars) Moreover, the company is again expected to turn profitable. To wit, analysts broadly expect GameStop to reveal $0.84 in non-GAAP earnings per share (EPS). Nonetheless, the video game retailer is still expected to show a loss for the entire FY 2021. (All figures are in dollars) GameStop had ended the third quarter of 2021 with $1.413 billion in cash and cash equivalents. With the company plowing ahead in its quest to establish a comprehensive NFT marketplace for gamers and content creators, analysts are sure to hone in on GameStop’s cash balance for any indication of surging cash burn. As a refresher, Immutable X became an Ethereum Layer 2 (L2) partner for GameStop’s NFT platform back in early February 2022. Moreover, Loopring bulls are sure to scour the earnings report and the attendant earnings call for any indication of a partnership. For the uninitiated, a recent Form 8-K filing by GameStop had intimated Loopring as another Layer 2 partner for GameStop’s upcoming NFT-focused platform.
Fear is Surging Ahead of the Video Game Retailer’s Q4 2021 Earnings Even Though the Open Interest on Calls Remains Dominant
As of the 16th of March 2022, GameStop had a 10-day Put-Call ratio (based on volume) of 0.7117. This suggests that just 0.71 puts were traded (either bought or sold) for every call option. Moreover, the stock’s 60-day Put-Call ratio is currently at 0.7722, suggesting near-term relative stability in the distribution of puts vs. calls. As can be seen from the snippet above, the open interest on calls dominates nearly all near-term expirations for GameStop. In fact, it is only when we reach the 29th of April expiration that put option open interest gains precedence. A cursory look at the above data would lead many to conclude that GameStop bulls have the upper hand currently. However, open interest does not indicate whether a trade was initiated by buying or selling an option. Consequently, we need to dig deeper to carve out the underlying bullish or bearish thesis. To do this, I like to look at the spread between the implied volatilities of 25-delta puts and calls. As a refresher, a 25-delta option is one that has a roughly even chance of expiring in the money. Moreover, as demand for options increases, their implied volatilities also surge. So, how does this measure stack up for GameStop? As is evident from the snippet above, the IV spread between 25-delta GameStop puts and calls is currently the highest it has ever been in a 1-year period! This suggests elevated demand for put options, perhaps as a hedge against today’s high-stakes earnings. Bear in mind that IV usually mean-reverts. Consequently, this metric will likely normalize in the days ahead as either GameStop shares surge, leaving puts in the proverbial dust, or the stock plunges, thereby allowing the puts to be monetized. Nonetheless, if the stock surges today, put option sellers will be in an enviable position given the extremely rich premiums that they are currently collecting, further boosted by the surge in the intrinsic value of their positions should GameStop shares rally.
