Monday, May 16, 2016

Three Gamestop Options for your cosideration

I own Gamestop (GME) and am slightly underwater.  I bought at $40 and I followed through and added at $24.   Theirs is a fickle business.  All these games are new to me and I know, as an outsider, that most of this stuff comes to devices without wires.

The knowledge that content is streamed these days, brick and mortar stores are lagging and that Gamestop owns stores that distribute games makes me nervous.  They pay a very nice dividend even increasing it a little (one cent) recently.  Call options were very good early on.

This was one of my investments that pays a good and increasing dividend with a low debt to equity ratio and I was hoping to cash in on the Christmas season last year and I got greedy.  But let's look at the upside and the downside of GME through the eye of the covered call junky.

Covered Call Junky

I love covered calls.  Most often I win which means I supplement my income and my principle either grows or is stable and when I lose, it tends to be  lost potential (the stock continued to go up) but I pocket the gain from a strike price no less than  my basis.  The worst thing that can happen is the stock tanks and I cannot get rid of it because it is on call. 

Mitigate Risk

The way to mitigate the risk that you can't unload a bad investment is to start with a stock that has some good fundamentals.   One of those is the dividend.  If your stock tanks at least you get paid the dividend while you wait.  Once in a while you get stuck with a stock that not only tanks, it reduces or suspends the dividend.   These are not good circumstances and you need to mitigate that risk as well.

You are really worried about a stock that just cut the dividend going belly-up or in other words bankruptcy .  In the beginning choose a stock with a reasonable D/E (debt to equity ratio).   You may lose your dividend  and additional income from subsequent covered calls because nobody wants this dog either, but it is highly unlikely that you will lose all your principle.

Dollar Cost Average

With these thoughts in mind, I bought GME in 2015 at $40 ish and added in 2016 at $24 ish.  I have received five dividend payments.  Moreover, I have received call premiums in 2015 in April, June, August, and October.  My stock was never assigned.

Which Call should I pick? 

Put together all my thoughts on GME and I am willing to sell more calls at near my cost basis to boost my income and hope to be a winner overall on GME.   If I am stuck with it, I am willing to bet the Christmas season will again boost their fortunes and mine through covered calls.   But I still would not mind losing it.  What is my down side?    With a D/E ratio of about .17 I think they are in good financial shape.

Three calls were available today and I use math to decide what to do. The three calls are:

  1.  June 17 $32 strike 
  2.  June 24 $32 strike
  3.  July 15 $33 strike
Below are the results: 

Yield on the call premium is simply the percent of your principle you receive from the call premium.

Total return, if called, includes the capital gain from selling shares at the strike price, plus the option premium and the dividend. 

You can see that all options look good.  Your time risk is no more than 60 days if you go for the best return.  Your time risk is shortened to 32 days by selling the June 17 strike price $32.  At this writing GME closed at $29.02 (about my basis ) so I used that basis to determine the return from each of these calls.

I use these calculations to help me decide what to do.   I want the cash from the premium and the next dividend; after that I would like the call buyer to take it.  It could end up being a win for both of us.  I am going for the June 17 $32 strike.  I am not going to be greedy again with GME.


Long GME: hoping for calls