Trading GME: a journey through fear and greed

TLDR: Within four days I made $3800 with GameStop(GME). During the four days, both my brokerage accounts and emotions oscillated like a roller coaster. This was my first time trading a meme stock.

How I learned about GameStop (GME)

During late January GME’s price was erratic due to short squeeze and price fluctuations. Its price rose from $20 in December to $350 within a month. After a few brokerages limited or banned trading the stock the news coverage increased. I finally looked into why GME was in the news on Monday, February 1st. The stock was still overvalued at $220. Many traders from r/WallStreetBets posted their winnings, and I was eager to learn how they made money.

Why I jumped in

The GME stock was almost $4 in July 2020 and the company has not improved dramatically to merit a $220 price tag. As the price rose an ex-Amazon joined as the CTO, but the headwinds remained. The stock won’t stay at $220. Volatility can be profitable.

How to make money with GME?

I went through my checklist with GME:

1. Is this a long term or short term trade? Short term and I had no intention of holding the stock.
2. How short is the term? I went with the option expiring in the current week, with plans to close by Friday to avoid watching the price on Saturday.
3. Trade the stock or options? I didn’t want to hold the stock or short it, so options it is.
4. Call or puts? Calls were exorbitantly priced given the stock’s high price. With puts I have more experience; I sold cash-secured puts on other stocks for almost a year. Far out-the-money puts (with a strike price much lower than the stock price) were affordable; they would have been profitable when the stock price plummeted, but I didn’t consider them enough to purchase.
5. Buy or sell? I wanted a high probability bet, collect premium upfront, and benefit from the time decay, so selling it is. I went with a strike price of $50 with less than 10% probability. The premium would be $1.3, which puts maximum profitability at 198%¹.
6. How much money to risk? Since this was a volatile stock, I did not bet the farm, dip into my savings, or borrow money. So I settled for 14 contracts to control 1400 shares.
7. What is the exit strategy? I planned to exit at 50% profitability, ie. buy to close when the option’s price reaches 50% of its selling price.
8. What if the market went against the position? I would take the assignment and sell the stock. If the stock crashed from $220 to $50 in one week, it might be able to recover during the following week.

A rollickin’ week

Monday

I combed through r/options to see others’ take on how to make money from GME. This subreddit is more educational and less crazy than r/WallStreetBets.

Feeling: greed. I put in an order to sell the current week’s option for 11 contracts for the strike price of $50 at a $1.3 premium.

Tuesday

Good news: my orders went through at a $3 premium, twice the price I put in. Bad news: GME plummeted from $220 to $88, and my puts were underwater. I sold another three contracts of the weekly options at an $8 premium.

I realized if I bought puts instead of selling them I’d make 200+% gains in one day. I looked into buying puts: they were expensive after the stock dropped sharply.

Feeling: fear. If stock plummets to below $50 on Friday, since I sold puts I would buy them at $50. Ideally, I wouldn’t hold the shares. Notice how quickly greed turns to fear when dealing with the stock market.

Wednesday

GME’s price rose to over $90. Instead of the 50% profitability, I put in orders to Buy To Close at a $0.6 premium to close out this week’s puts. They did not go through.

Feeling: greed. I was willing to wait until the last trading hour on Friday to collect the maximum premium.

Thursday

GME drops to around $53. 11 out of my 14 option contracts were underwater. I waited for the stock to rebound later that day; it didn’t.

As for buying puts I almost placed an order to buy the $30 strike price; if I did I would have made money by end of the day, oh well.

As Robinhood lifted trading restrictions on GME near the end of day I anticipated the stock price to rise over $50, but who knows what’ll happen.

Feeling: fear.

Friday

I got up at 7 am PST (early for me) to close GME positions at $1.5 premium or better. As the orders were executed the share price rose from $60’s to $80’s. I glared at the app until all the positions were closed.

When I looked up puts for a new order, all the quotes came back as 0. The stock was halted; another reason to stay away from GME.

Feeling: relief

Reflection

Overall annualized gains were 578%² during the four days. The stock was volatile and I had fourteen contracts; I could have been assigned 1400 shares, too large of a position. I would feel better selling fewer contracts, and buying more puts.

As for timing, the returns would be similar if I closed the position two days earlier on Wednesday, had I stuck to the 50% profitability. Exiting earlier would have freed money and curtailed the trepidation.

I learned one way to increase profitability when trading on volatility is to use vertical spreads: it combines selling and buying puts, and the bought puts will be profitable when the stock price plummets.

Conclusion

With the GME trade, I got $3800 for four days of trepidation. It was a hasty decision to take advantage of volatility, and it paid off. I also got more excitement than I bargained for; next time I’d target a non-meme stock, or trade fewer contracts.

I’m happy with the results and look forward to learning more about options.

¹ 198% = 365 / 4* 1.3 / (50 * 1.2))

² 578% = 365 / 4 * 3.8 / (50 * 1.2)