August 1st Options Now Available For GameStop (GME)

A covered call strategy on GME stock, involving purchasing shares at $23.10 and selling a $34.00 strike call expiring August 1st for a $0.75 premium, offers a potential 50.43% return if the stock is called away. However, the odds of the call expiring worthless are currently estimated at 79%, providing a 3.25% YieldBoost, or 23.70% annualized return, but leaving the investor holding the shares. The implied volatility of the call is 101%, while the trailing twelve month volatility is 68%.

Analysis

The article outlines a covered call strategy on GameStop Corp. (GME) stock, involving purchasing shares at $23.10 and simultaneously selling the August 1st $34.00 strike call option for a $0.75 premium. This strategy offers a potential maximum return of 50.43% (excluding dividends and commissions) if GME's stock price exceeds $34.00 at expiration, leading to the shares being called away. However, there is a 79% estimated probability that the call option will expire worthless, as the $34.00 strike represents an approximate 47% premium to the current share price. In this more probable scenario, the investor retains the shares and the $0.75 premium, realizing a 3.25% return on the stock holding (annualized to 23.70%, termed YieldBoost). A key observation is the discrepancy between the call option's implied volatility of 101% and GME's actual trailing twelve-month volatility of 68%, suggesting that current option prices reflect expectations of higher future volatility than recently observed, potentially making option selling strategies like covered calls more attractive due to richer premiums. The strategy inherently caps upside potential if GME shares experience a rally significantly above the $34.00 strike price before expiration.

Key Decisions for Investors

• Investors considering this GME covered call should evaluate if the potential 50.43% capped return or the 3.25% YieldBoost (with a 79% probability of retaining shares) aligns with their risk tolerance and outlook for a stock known for significant price swings.
• The notable premium in implied volatility (101%) over historical volatility (68%) suggests that option sellers are being well compensated for the risk, but this also implies heightened market anticipation of GME price movement, which could challenge the strategy.
• Monitor GME's price action closely relative to the $34.00 strike and be prepared for the possibility of either shares being called away, thereby realizing the maximum gain of the strategy, or the option expiring worthless, which provides a yield enhancement but leaves exposure to the underlying stock's price fluctuations.