Bearish investors are using options to capitalize on a slump in shares of GameStop Corp by more than half their value on Tuesday.
Put options, often used to protect against losses or position for declines in a stock’s price, outstripped bullish calls in volume by a ratio of more than two to one on Tuesday, continuing a trend that has seen bearish derivatives bets on GameStop grow over the last week-and-a-half.
The videogame retailer’s shares, which have seesawed wildly with hedge funds and other investors making or losing billions of dollars, were last down 56.3% at $98.33. They are now worth less than a quarter of their high of $483 last week.
The positioning marks a reversal from six straight weeks of GameStop calls dominating daily volume, as options bets helped fuel a 1,625% rally in the video game retailer’s shares in January that triggered heavy losses among some investors who had shorted the stock, betting on its price to fall.
“People are putting on puts in order to profit from the eventual GameStop short squeeze to be over,” said Matt Amberson, principal at options analytics firm ORATS.
Some investors may be turning to puts as an alternative to shorting the stock, analysts say. Demand to borrow GameStop shares has subsided significantly in recent weeks but remains high overall, making it relatively expensive to short the stock.
That has made put options more appealing in comparison, said Garrett DeSimone, head of quantitative research at OptionMetrics.
The stock’s sharp decline and the flight to put options are an inevitable consequence of the stock’s dizzying ascent, analysts said.
Last week, implied volatility in GameStop – an options-based measure of how much traders expect the shares to gyrate in coming days – suggested daily moves of as much as 69% in either direction, according to Amy Wu Silverman, equity derivatives strategist at RBC Capital Markets.
The simultaneous rallies in volatility and the share price served as a “harbinger of downside to come,” she said.
The run-up in volatility helped make GameStop options expensive, potentially putting them out of reach for some investors, said Steven Place, founder of InvestingWithOptions.
As a result, call buying subsided, eliminating a source of fuel for the rally in GameStop shares. Implied volatility on GameStop calls has since fallen significantly, another signal of a shift in trading.
“Once it starts to drop, that’s a warning sign that the squeeze is out of steam,” Place said.