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Keith Gill appears to be cashing in some of his bullish bets on GameStop

Selling options to buy more shares?

6/13/24 7:49AM

As we all know, pressure plus time equals diamonds.

But in the case of GameStop and Keith Gill’s massive options position, time equals more pressure on diamond hands.

Open interest in GameStop call options that expire on June 21 with a strike price of $20 (C20s) fell from nearly 170,000 to about 112,000 on Wednesday. According to his portfolio updates, Gill held 120,000 contracts, making him the dominant holder of them. The activity suggests that he is monetizing this options position, though that hasn’t been confirmed.

Gill was facing pressure to do so because he lacked the necessary $240 million in cash required to turn those contracts into more shares of GameStop (at a discount to its trading price). There was even the risk of these contracts expiring effectively worthless if he was unable to exercise money-good options.

Prior to Wednesday, the total on-exchange volume for the C20s was less than 19,000 since Gill posted his last update to the r/Superstonk subreddit showing a position of 120,000 in the strike. For trades of 200 contracts or more, over 60% took place on the bid side (versus just 4% on the ask). Since the bid is the highest price a buyer is willing to pay, this suggests the sellers of these contracts were the more motivated party behind these transactions.

A bit of speculative math here: If we attribute all trades executed on the bid or mid side in the last half hour of trading – when the price of these options was in free-fall – to Gill, then this would point to proceeds of more than $41 million. At a cost basis of almost $35 million, that would mean returns on this trade would be in the neighborhood of 20% so far. (Here’s a little background on how trades take place on the bid, ask and mid.)

Between the shares of GameStop he already purports to own and cash on hand, Gill would then seemingly have more than enough liquidity at his disposal to exercise the remaining options (if the above assumptions hold).

To some GameStop loyalists, however, these actions may somewhat undermine the bull case for a company that hasn’t done much over the past three years and a stock that is lacking a fundamental thesis

Across social media, many GME longs thought that Gill exercising those 120,000 contracts at once would cause a squeeze higher because market makers would face intense difficulties coming up with the 12 million shares to deliver to him. That’s despite the fact that around 100 million shares have traded per day, on average, over the past 15 sessions.

Of course, the bigger challenge was always Gill coming up with $240 million to turn the options into shares, not market makers sourcing the stock. 

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  • Revenue of $14.93 billion vs. expectations of $15.04 billion.

Shares were up 21% in after-hours trading, which is a pretty crazy stock move for a company with a market cap of more than $675 billion.

The market was likely impressed by a giant build in the company’s “remaining performance obligations,” or RPO, which is how the company measures the value of signed cloud computing deals that haven’t yet been reported as revenue. In a statement, CEO Safra Catz said: 

We signed four multi-billion-dollar contracts with three different customers in Q1. This resulted in RPO contract backlog increasing 359% to $455 billion. It was an astonishing quarter — and demand for Oracle Cloud Infrastructure continues to build. Over the next few months, we expect to sign-up several additional multi-billion-dollar customers and RPO is likely to exceed half-a-trillion dollars.”

The market was likely impressed by a giant build in the company’s “remaining performance obligations,” or RPO, which is how the company measures the value of signed cloud computing deals that haven’t yet been reported as revenue. In a statement, CEO Safra Catz said: 

We signed four multi-billion-dollar contracts with three different customers in Q1. This resulted in RPO contract backlog increasing 359% to $455 billion. It was an astonishing quarter — and demand for Oracle Cloud Infrastructure continues to build. Over the next few months, we expect to sign-up several additional multi-billion-dollar customers and RPO is likely to exceed half-a-trillion dollars.”

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Robinhood Markets notched a new closing high Tuesday, as the crypto, stock, and options brokerage continued to ride a rally set off by the announcement that it would be added to the S&P 500 Index.

(Robinhood Markets Inc. is the parent company of Sherwood Media, an independently operated media company subject to certain legal and regulatory restrictions.)

Robinhood appears to be benefiting from the so-called inclusion effect, a market phenomenon where companies that are added to major market indexes can see a price move as index funds — whose holdings must mirror the membership of the index — rush to buy the stock.

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Don’t call it a comeback!

GameStop is jumping aftermarket as the video games and collectibles retailer posted an impressive set of second-quarter results.

  • Net sales: $972 million (estimate $823 million).

  • Adjusted diluted earnings per share: $0.25 (estimate $0.16).

Note: these consensus estimates, compiled by Bloomberg, are from only two analysts.

The sales beat is particularly noteworthy, as the company had already done an exemplary job of expense control to help protect its bottom line. Revenues were up more than 20% versus the year-ago quarter, the biggest annual jump in sales since the company (and the world) was emerging from the pandemic in 2021.

The options market implies a move of plus or minus about 9.4% on earnings.

For a while, GameStop’s ability to generate positive net income was purely a function of the interest earnings on its substantial cash hoard. But now, GameStop has strung together five consecutive quarters of positive operating cash flows for the first time in its history!

This was the quarter when the company began to act on its bitcoin treasury strategy, raising money through the sale of convertible notes and using some proceeds to purchase the crypto asset.

Because of how much market value has been ascribed to potential for GameStop CEO Ryan Cohen to use its significant cash holdings to transform the company, the prospect of converting cash into bitcoin initially did not sit too well with investors following the announcement of this new strategic push in March.

Shares of the once-upon-a-time meme stock really didn’t get too much love during retail frenzies earlier in the summer, and were down about 25% year to date heading into this release.

As of the close of the quarter, its bitcoin holdings were valued at $528.6 million.

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Sherwood Media, LLC produces fresh and unique perspectives on topical financial news and is a fully owned subsidiary of Robinhood Markets, Inc., and any views expressed here do not necessarily reflect the views of any other Robinhood affiliate, including Robinhood Markets, Inc., Robinhood Financial LLC, Robinhood Securities, LLC, Robinhood Crypto, LLC, or Robinhood Money, LLC.