Thursday, December 8

GME Stock: GameStop Should Be Avoided or Shorted


  • GameStop (GME) is still top among Redditors, but shorts have the advantage.
  • GME stock’s price chart is at risk of more significant failure.
  • Investors should avoid GME stock or consider a bear put spread.

Source: Shutterstock / mundissima

Stocks were down big Wednesday and GameStop (NYSE:GME) followed suit as GME stock retreated by 13% with sky-high inflation and increasingly at-risk consumers a theme being played across financial newsfeeds.

An ugly 2022 for much of Wall Street just got a good deal uglier yesterday. April’s consumer price index (CPI) data revealed a stronger-than-forecast jump of 8.3% and reaffirming that most of life’s essential and non-essential goods are keeping inflation afloat near four decade highs.

The report took its toll on the broader averages with the S&P 500 and nasdaq down roughly 1.50% to 3.0% and hitting new year-to-date lows. And larger losses of around 5% to 8% in market leaders Manzana (NASDAQ:AAPL) and Tesla (NASDAQ:TSLA) made agreeable sense to investors as well.

But before you point fingers at fearful and deafening macro developments driving others on Wall Street crazy, it’s simply time to acknowledge, avoid or even short a GME stock whose siren song has lost its voice.

ticker Company Current Price
GME GameStop $81.33

GME Stock Is Still King, Without a Court

Inflation. Rising interest rates. Poor fundamentals. When some investors discuss GameStop’s opportunity to move forward, those items invariably are a big piece of the conversation. And it’s usually a message that’s negative.

I can’t fault the caution or outright bearishness. That seems especially true given a fledgling brick-and-mortar retail gaming business that’s past its prime and attempting to pivot into something more 21st century featuring a larger digital presence, crypto, non-fungible assets (NFTs) and, who knows, maybe even an angle in the metaverse? Apparently.

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So, yeah, Wednesday’s CPI data obviously has a place in any dialogue regarding GME stock.

But it would be reckless to ignore the impact other chatter known as “mentions” or lack thereof, in the investment forum of Reddit’s r/wallstreetbets. It’s that activity among a subset of aggressively bullish traders known as apes that made GME stock a household name over the past year.

GME stock mentions are still a thing and GameStop remains the king of memes played by Redditors. But it certainly doesn’t hold court like it did.

On Wednesday in fact, CPI mentions of around 1,000 took top honors on WallStreetBets. By comparison, GME stock was in sixth place with about 180 remarks and roughly 1% of what the real “Gamestonk!!” Siren song remains mostly about.

GME Stock Bottom Is a Bluff

GameStop (GME) is challenging its March low, but don't expect a double bottom to hold in today's market environment

Source: Charts by TradingView

Not only are the wildly frisky days of tweets being retweeted and tweeted again as mentions responsible for GME stock’s legendary short squeezes largely over, but those infamous diamond hands have been replaced by a 2-7 off suit in no position to bluff.

Technically, GME stock could be tempting some traders into buying shares as it challenges its March low. It’s a classic scenario which could play out as a bullish double bottom pattern. But don’t expect GameStop’s short interest of 20% to blink, let alone run for cover.

Not only does a weak-looking stochastics warn that buying GME stock and profiting from the pattern is a longshot, but there’s no price confirmation. On the provided weekly chart that would require an impressive bounce in its own right of nearly 50%!

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But even on the daily time frame, buying a volatile double bottom (if the pattern receives technical confirmation) requires too much faith in a meme stock movement that has seen its heyday and one further challenged by today’s risk-off environment.

GameStop Takeaway

So if buying GameStop has the deck stacked against it, a short should make sense, right? It does. And with shares still commanding a $7.5 billion market cap and GME more than four-fold higher than 2021’s low, there’s room to play it bearishly alongside GameStop’s short interest.

Appreciably, shorting GME shares remains a riskier proposition given its day-to-day volatility or the possibility of a muted short squeeze. But an out-of-the-money bear put spread can help with those types of challenges.

A vertical of this kind limits and vastly reduces unwanted upside exposure if GameStop rallies. Conversely, the strategy can generate outsized profits compared to an equivalent short stock position if GME trades lower.

As with anything, there’s compromises. Among other things, with this sort of strategy returns aren’t maximized until expiration. And in the interim when trying to capture profits or further minimize contained losses, GME’s volatility can make that sort of disadvantage look more significant.

But ultimately, a bear put spread’s pros far outweigh the cons in trading GameStop more smartly than shorting shares.

On the date of publication, Chris Tyler did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.




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