GameStop's Surprise Profits and Huge FCF Causes Unusual Options Activity

GameStop GME reported its first profit in the past 2 years last night and as a result, GME stock is up over 36% in early trading on Wednesday, March 22 to $24.15. This has led to huge unusual put option trades for expiration on Friday, March 24.

After hours on March 21, GameStop reported that sales for the quarter ending Jan. 28, 2023, were off 1.2% YoY. However, its net income was $48.2 million, compared to a net loss of $147.5 million for the prior year’s fourth quarter. That has essentially shocked the market and the stock has taken off.

Moreover, the company's inventory was lower than last year and, as a result, the company generated positive cash flow from operations (CFFO) of $108.2 million for the year. After deducting $55.9 million for capex spending, GameStop's free cash flow (FCF) was positive at $52.3 million.

More importantly, according to an analysis of data from Seeking Alpha, during Q4 GameStop generated $338.2 million in CFFO and $326.6 million in FCF (after deducting $11.6 million in capex spending in Q4).

That essentially means the cash burn at GameStop has stopped. Indeed, its cash and marketable securities balance rose from just over $1 billion last quarter ($1.042 billion) to $1.391 billion. That means that cash and securities rose by 33% or $349 during the last quarter. That is roughly the same amount of gain in its CFFO.

Moreover, as GameStop now has just $39.5 million in long-term debt and $423.3 million in other long-term liabilities, its net cash position is slightly below $1 billion at $928.2 million. If cash flow remains positive, its net cash positive should exceed $1 billion this quarter. That represents 12.6% of its present $7.3 billion market value.

These developments and analyses are girding the underlying optimism about the stock. As a result, there have been huge moves in the options market in GME stock.

Unusual GME Put Option Trades

For example, Barchart's Unusual Stock Options Activity Report shows that there are a number of tranches of huge unusual activity in GME put options - all for expiration on Friday, March 24.

The above table shows that these put options are all trading with huge volumes. Essentially a number of participants likely got caught in the wrong trade. They may have been thinking that the earnings release would have shown worse performance. Now they are selling their positions and taking losses.

On the other hand, those investors who are selling short new put positions are gaining a good income play. Look at the $20 put strike price for March 31. The premium of 45 cents represents a 2.25% return on the $20.00 strike price with just 9 days to expiration. In addition, the March 24, $20 put strike price offers a short put investor a 19 cents premium or 0.95% with just 2 days to go.

This shows that investors are trying to take advantage of the huge run-up in GME stock. Right now the near-term out-of-the-money put options are offering good yield opportunities for investors. This is due to the optimism on GME, especially given that it has now turned free cash flow positive in a big way.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.