I woke up from a deep sleep this morning to a flurry of text messages. As is sometimes the case, all of them were about GameStop (NYSE:GME), which surged more than 70% this morning. The news? Massachusetts-based meme stock trader Keith Gill, a.k.a. "Roaring Kitty," posted some screenshots on Reddit showing that his account is nearly all-in for $175 million. That's a huge bet, and the news quickly went viral.
Roaring Kitty Is Back
After weeks of cryptic tweets, Gill's Reddit account posted screenshots this morning of an Etrade account showing a nearly $175 million bet on GME. For good measure, he also has nearly $30 million in cash sitting in his account. I don't have any way to independently verify these figures, but when the news broke I quickly checked the options chain to see if the open interest in the calls matched his claims. And after a quick check, I can confirm that the June calls do indeed have massive open interest, more than enough to support the size of the claimed bet.
To be fair, I'm not entirely sure how Gill got his hands on $200-plus million after paying income taxes to the US and Massachusetts. US income tax + 3.8% Medicare surcharge + Massachusetts taxes on short-term capital gains until recently added to over 50%. To have this much money Gill likely had to make $425 million or more trading, assuming this money is all personally his. I guess it's plausible. Trading scales nearly limitlessly as a business. To this point, Gill started posting on Reddit before COVID with a $53,000 bet on GameStop. In his last Reddit update in April 2021, he disclosed around $35 million in GME and cash.
GME itself hasn't appreciated at a pace that would turn $53,000 into $200-plus million. Thus, it appears that he's consistently been able to buy low and sell high with tons of leverage. If trading GameStop is a game, no one is playing it better than Mr. Gill. At least so far.
GameStop's Fundamentals Aren't What You Think
GameStop traders seem to fall largely into two camps:
1. Those who think that it should be more valuable than the market capitalization of a small country.
2. Those who think that it's worth $0 and going there soon.
If you look at GameStop's income statements and balance sheet though, the truth is actually in the middle. GameStop isn't a money furnace like AMC Entertainment (AMC). It's also not a cash cow. GameStop incurred an operating loss last year of roughly $31.7 million but earned $49.5 million in interest/investment income. Compare this with the nearly $1 billion recently raised from GameStop's secondary offering last month.
At this pace, GameStop will be able to bumble along for years and possibly indefinitely. Any time the stock price is high due to a Reddit craze, they'll be able to raise money. GameStop was worth about $1.3 billion in book value as of the last quarterly result ($4.38 per share, give or take). But if we assume the last share sale brought in $900 million net to the company, that pushes book value to $2.2 billion, or roughly $7.21 per share. And if GME skyrockets at some point, why not do another $1+ billion secondary offering? That would push the value to $11 or higher. It's an ideal situation for a company looking to raise money because they're basically breaking even financially and have these periodic spikes where they can raise money. GME's business probably isn't worth $30 in the long run, but if you're bothering to read my articles then you already know that.
In my mind, this is a perfect setup for swing trading – using volatility to your advantage. Timing is everything. Those who bought around $20 after GameStop announced its almost billion-dollar secondary offering are up big, while those who bought this morning pre-market for $45 are currently hating life. Plus, the options are loaded with premium, so you can limit your risk and sell your upside for a large theoretical edge.
How I'm Trading GME
Everyone is looking for lottery-like payoffs on GameStop, mostly longs but also shorts to some extent. The implied volatility on the options is above 200% for most strikes and expirations. This put me in a position where I was able to buy GME for about $22 last week and sell June 21 $25 calls for $3.15. My shares will likely get called away, but that's about $6 per share off of $19 at risk for three weeks. Rinse and repeat. While GME is trading for above its fair value, buying the stock gives you a lot of optionality because it's periodically subject to these meme spikes.
As long as you don't pay too far above fair value, you're very likely to be able to earn multiples of your original investment over time by selling covered calls and cash-secured puts on the stock. We know GME has a rough price floor of around $10, and options are always trading for crazy high prices, which limits the risk. When GME is low you can buy it and sell OTM calls, and when it's high you can wait out the crazy spikes and sell OTM puts.
It's a classic options wheel strategy with a little swing trading 101 on a very volatile, irrational stock. You don't have to make very strong assumptions to think that Redditors are overpaying for short-term call options on GameStop, and the balance sheet and income statement are good enough that I have decent certainty that I'll be able to do the strategy for years. I won't make 10x my money in 10 days, but my downside is defined and I can pocket options premiums over and over again, for 25% or more of the value of my stock position every month.
Bottom Line
GameStop is a wild ride. Treat it with caution, but it's a great stock to swing trade. And good luck to Roaring Kitty and his all-in bet on GME. Don't try that one at home!
Logan Kane
Author and entrepreneur. My articles typically cover macroeconomic trends, portfolio strategy, value investing, and behavioral finance. I like to profit from the biases and constraints of other investors.You can read some more of my work for freehere.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of GME either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
I sold a covered call position on GME via June 21 $25 calls.
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