GameStop Options Expiration Could Crater Reddit’s Favorite Stock

Call options covering four million shares in GameStop Corp. expired on Friday, and the stock dropped right on cue:

A call option gives you the right to buy a stock at X price. For the market maker to be able to sell you that option without risking going broke, they need to own the stock themselves. Let’s say you bought an option to buy GameStop stock at 300. What if it goes to 600? The market maker is out $300/share. To mitigate this risk, the market maker owns the underlying share so they’ll have the $300 they need if that happens.

But when call options expire, the market makers who sell options don’t have to hold the stock anymore. Option expiration may have helped extinguish the last big GameStop rally:

In the last rally, the weekly January 29th expiry date marked the beginning of the end for GME

I believe this happened because market makers were released from their obligation to hold GME stock as a hedge.

Now another huge block of options has expired. And an even larger block will expire this Friday, March 19:

I see a catalyst that could start the collapse of this bubble as a large number of options are set to expire this Friday the 12th. Market makers will be released from their obligation to hold almost 4 million shares. If that doesn’t do it, another 6.6 million shares will be freed up the following week.

I could definitely see this driving down GameStop shares further, especially since we haven’t seen any significant good news on this company recently. And its fundamentals are weak, with huge losses on its 5,000 physical stores that predate COVID.

For more on GameStop, check out these posts:

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Photo: “Retail GameStop” by ccPixs.com is licensed under CC BY 2.0

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