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Beloved meme stock and short squeeze play, GameStop (NYSE: GME), is back in the news after GME stock rallied 20% on November 29th. While many traders took advantage of the rally, one trade really stands out.
This trader turned $70 thousand into $1.28 million over just two days, a staggering 1400% return! The question is whether this was just amazing luck or something more? Find out what this means for GME’s earnings and whether you can replicate this trade in the future.
GME Stock Surprise Rally
This huge return seems to suggest that the trader must have known that something was up. Seemingly out of the blue, trading volume increased from 14,192,900 on November 28th to 61,172,800 on November 29th, causing GME to run 20%. Some have speculated that this sudden increase in volume was the result of institutions buying or momentum from retail traders.
If the trader who made an astounding $1.28 million on the trade knew that there would be this sudden increase in volume and price, then that would explain his remarkable trade. However, there was no clear fundamental reason for the 20% increase which may mean that his $70 thousand trade was meant for the earnings itself.
Because the earnings are due to be released on December 6th, and his options had an expiration of December 12th it makes sense that this trader was actually intending to profit from the earnings and not the surprise 20% increase. If that’s the case then he may have had insider information that led him to be bullish on the earnings but decided to take profit when he made a surprise 1,400% return earlier than expected.
If we look at the other possibility, which is that the trader knew there would be a 20% increase on November 28th, then that would mean he either had knowledge of coordinated buying from retail investors or buying from institutions.
GME Stock Short Interest
Since GME’s short interest was 22.5% at the time, it’s possible a group of investors were trying to trigger a short squeeze. While this level of short interest is not insignificant, it’s not significant all on its own. However, it’s possible that shorts were forced to cover their position and the sudden spike in price led other investors to jump in as well, driving demand.
As for the other theory that this rally was a result of institutions buying and the trader somehow knew there would be buying that day, this seems less likely. Institutions usually don’t suddenly buy stocks in large quantities all at one time therefore this does not seem like the most likely explanation.
So if he was not privy to some sort of inside information or a coordinated effort by other retail traders then how did he manage this amazing trade? The most likely option seems to be that he was trying to trade the upcoming GME stock earnings, but there is another possibility that this was somehow a fantastic technical trade.
Looking at the chart, we see that GME stock has increased in the lead-up to its last 3 earnings which was likely influenced by other catalysts in addition to the earnings. However, GME stock recently reached a new low, so these two factors combined may have led the trader to buy calls expecting a rebound.
Was this the best possible option for the trader?
After exploring what caused the 20% increase and whether the trader knew it would happen from the start, you are probably wondering if the trader could have made even more than $1.28 million given the circumstances. Nothing is worse than leaving money on the table, but with $1.28 million profit its hard to be disappointed.
While in hindsight, it definitely seems like a great trade, a better option could have been to hold the calls longer given the pattern we’ve seen over the past 3 earnings. Looking at the chart now GME stock moved even higher than when the trader sold, which could have offered an opportunity to profit even more from the trade depending on IV crush.
Another factor to consider is what price he purchased the contracts at. If he could have gotten in at an even lower price per contract then his profits on this trade may have been even higher – but altogether this trader undoubtedly did very well.
Even though it’s unlikely, it’s worth mentioning the possibility of a short squeeze. As we speculated before, it’s possible this trader had inside information regarding GME’s upcoming earnings. This surprise catalyst combined with the short interest of 20% or higher could be enough to squeeze the shorts and drive the price higher. However, keeping in mind that his calls were set to expire on December 12th, there was a limited time for this to occur.
So what was the second-best option? While this whale pulled off a great trade the second best option would have been to buy shares covered by a put so losses would be avoided if GME stock price fell. The stock could have been sold at earnings, and the put could have been exercised after the stock price fell following the catalyst.
Can this trade be replicated?
So now you are wondering how you can replicate this yourself. Well, unfortunately, it would be difficult to replicate this trader’s exact results. However you can look for unusual movements like this before they’ve played out. For example, you could start by looking at the options chain and look for a spike in relative volume. Then, look for someone buying calls or puts that are significantly OTM. This unusual activity could signal that this whale is expecting a huge movement.
You should take it a step further and look for confirmations using the company’s fundamentals. See if there are any upcoming catalysts such as earnings or rumors of an acquisition. Using this method you can try to catch trades like this one and potentially benefit from the inside information that may have led them to make the trade in the first place.
GME Stock Earnings
As for the earnings themselves, looking at the trend over the last three earnings GME could beat analyst projections again and then decline afterwards. But considering this unusual trade and the company’s improving fundamentals, it’s possible the company will come out with an earnings surprise.
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