Keith Gill’s $175 Million Bet on GameStop Sparks Frenzy

Keith Gill, known online as “Roaring Kitty,” has ignited an internet frenzy with his recent $175 million investment in GameStop (NYSE). This bold move has caused GME stock to surge by over 70% before pulling back slightly.

GameStop’s Current Situation

Fundamentals

GameStop’s financials indicate that it is neither a failing business nor a highly profitable one. The company posted an operating loss of approximately $31.7 million last year, but this was offset by $49.5 million in interest and investment income. Despite these mixed results, GameStop recently raised nearly $1 billion through a secondary offering, boosting its book value significantly.

Trading Strategy

Given the volatility of GME stock, I have opted for a covered call strategy. This involves buying the stock and selling call options at a higher strike price, allowing me to capitalize on the stock’s high implied volatility, which exceeds 200% for most strikes and expirations. For instance, I purchased GME at around $22 and sold June 21 $25 calls for $3.15, locking in a substantial premium while limiting my risk.

Roaring Kitty’s Massive Bet

The Investment

Keith Gill’s massive $175 million bet on GameStop, coupled with nearly $30 million in cash in his account, has been confirmed by substantial open interest in the June call options. This suggests a highly leveraged position that could yield significant returns if the stock price increases further.

The Impact

Gill’s actions have reignited interest in GameStop among retail investors, reminiscent of the stock’s previous surges driven by Reddit communities. While it’s unclear how Gill amassed such a large sum after taxes, his consistent ability to trade GME profitably has been nothing short of remarkable.

Analyzing GameStop’s Value

Two Camps

Investors in GameStop typically fall into two categories: those who believe the stock is undervalued and those who think it is vastly overpriced. In reality, the company’s fundamentals place it somewhere in between. GameStop’s ability to raise capital during market spikes and its stable financial position suggest that it can continue operating for years, if not indefinitely.

Financial Position

With a current book value estimated at around $7.21 per share, boosted by recent capital raises, GameStop has a solid financial foundation. This provides a safety net for investors and the potential for further capital raises during future stock surges, possibly pushing the book value even higher.

Trading GameStop

Volatility and Options

The high volatility of GME makes it an ideal candidate for a swing trading strategy. By buying the stock at lower prices and selling covered calls, investors can generate substantial income while limiting downside risk. The options market’s high premiums offer an opportunity to earn significant returns with a defined risk profile.

Strategy Execution

Using a combination of buying shares and selling out-of-the-money calls, I aim to capitalize on the stock’s volatility. When the stock price is low, I purchase shares and sell calls, and when the price spikes, I refrain from buying and instead consider selling puts. This approach allows for consistent income generation with limited risk.

Conclusion

GameStop remains a highly volatile stock with significant trading opportunities. While Keith Gill’s massive bet has drawn attention, a more conservative approach using options can still yield substantial returns. By leveraging the stock’s volatility and the high premiums in the options market, investors can profit from GameStop’s swings while managing their risk.