Investors in GameStop Corp. GME need to pay close attention to the stock based on moves in the options market lately. That is because the January 13th, 2017 $24 Put had some of the highest implied volatility of all equity options today.
What is Implied Volatility?
Implied volatility shows how much movement the market is expecting in the future. Options with high levels of implied volatility suggest that investors in the underlying stocks are expecting a big move in one direction or the other. It could also mean there is an event coming up soon that may cause a big rally or a huge sell off. However, implied volatility is only one piece of the puzzle when putting together an options trading strategy.
What do the Analysts Think?
Clearly, options traders are pricing in a big move for GameStop shares, but what is the fundamental picture for the company? Currently, GameStop is a Zacks Rank #3 (Hold) in the Retail – Consumer Electronics industry that ranks in the Top 10% of our Zacks Industry Rank. Over the last 60 days, no analysts have increased their earnings estimates for the current quarter, while four analysts have revised the estimate downward. The net effect has taken our Zacks Consensus Estimate for the current quarter from $2.36 per share to $2.33 in that period.
Given the way analysts feel about GameStop right now, this huge implied volatility could mean there’s a trade developing. Often times, options traders look for options with high levels of implied volatility to sell premium. This is a strategy many seasoned traders use because it captures decay. At expiration, the hope for these traders is that the underlying stock does not move as much as originally expected.
Looking to Trade Options?
Each week, our very own Dave Bartosiak gives his top options trades. Check out his recent live analysis and options trade for the MU earnings report completely free. See it here: Bartosiak: Trading Micron Technology's (MU) Earnings with Options or check out the embedded video below for more details:
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.