Background:
Gamestop (GME) is a bricks-and-mortar retailer of physical game discs, gaming accessories, merchandise, and used game discs. They face risks due to decreasing mall traffic, the shift to downloadable games and online retailing, and the obsolescence of physical game discs, with the next hardware cycle probably not even having disc drives. Comparisons are made to Blockbuster video in the early 2000's. Lots of hedge fund money plowed into shorting the stock in 2020, to the point where short interest exceeded 135% of the float.
The high level of short interest led to an epic short squeeze, and since April the stock has gone from $3 to almost $100. The squeeze is actually being organized / pumped by the 1.8 million users of Reddit's wall street bets sub, some of whom have become paper millionaires going long the stock and its call options. Today the stock is up 51%. Friday it was up something like 45%. Trading was briefly halted both days.
Prognosis:
The only significant change in GME's prospects has been a position taken by Chewy cofounder Ryan Cohen, and some board seat changes initiated by him. This sparked speculation that GME will close physical stores and transform into a Chewy or Netflix-like digital distributor. It could happen; dumber things have occurred. Yet it would seem Amazon, Netflix, Apple, Facebook (remember Occulus?), Microsoft, the game developers themselves, or a startup unencumbered by the physical store legacy would be in a better position to execute such a plan - and they are all facing flattening growth if they do not move into new markets. Again, there are many cases of well-capitalized companies missing the obvious, so it could happen that no big competitor decides to seize this game distribution middleman market in the next 2 years or so. As of now, GME management has not articulated a clear physical-to-digital transformation plan.
In the short term, the company is certainly not worth $6.6 billion. That's 15% of a Chewy or 143% of a Macy's. The stock is where it is due to the short squeeze, and that's the end of story. I don't see the company getting cheaper credit due to the short squeeze or being able to issue shares at today's inflated values. If they did issue shares, it would pop the short squeeze, and prices would go down in a hurry.
GME went to the moon, but it can't keep climbing forever. Most short squeezes end after a period of several months, but this is not a typical short squeeze due to (1) a lack of fundamental justification that would keep the stock propped up, such as an earnings surprise, (2) short interest over 100% of float instead of the more typical 20-30%, and (3) the involvement of retail investors.
The price is still increasing at a beyond-exponential rate as the shorts are margin called. In theory, the squeeze ends as the shorts are liquidated and the cost to short goes up (currently ~25%!), but some may double-down. Short interest has only gone from 135% to 102% this month.
Additionally, we all know the end game of the wall street bets retail investors is to sell GME high. If they all started selling, the price would plummet. Thus there is a certain prisoner's dilemma to the squeeze - this cartel of retail investors don't know each other's plans and nobody wants to be the last one to sell their GME.
The willingness of both sides to play chicken means short term price action is unpredictable - it might go up or down 50% tomorrow. However I think the long-term is more clear.
The Question:
I humbly predict GME will be worth less in 6 months than it is today. How would you profit from this view?
a) Buy the July 16, 2021 $70 strike put for $38.5/share (breakeven at $31.5).
b) Buy the July 16, 2021 $10 strike put for $1.75/share (breakeven at $8.25).
b) Sell a bear put spread at 80/90, attempt to earn 50%.
c) Set up a condor, etc. (so far volatility has been so high none of these appear profitable)
