GameStop raises $2 billion: What’s next?

GameStop has made waves again by completing its ATM (At-The-Market) offering, raising a whopping $2 billion. This latest move brings the company’s cash reserves to an impressive $4 billion, all while keeping its debt minimal. Notably, this cash makes up 40% of GameStop’s market cap. But the story doesn't end here. Let's explore what this means for the company and its investors, especially with some significant options expiring soon.

Financial moves and stake changes

With the recent ATM offering, Ryan Cohen’s stake in GameStop has dipped from 10% to 8% due to dilution. This change could prompt Cohen to buy shares on the open market to regain his original 10% stake, which would undoubtedly stir the stock dynamics. Cohen’s influence is substantial, and any moves he makes are closely watched by the market.

This financial manoeuvring is happening just as GameStop’s annual meeting is set for today. Investors buzzed with anticipation over possible major announcements. Additionally, prominent trader Keith Gill, known as "Roaring Kitty," might start exercising his in-the-money call options, further intensifying market activity.

Key options expiring June 14

The options landscape is heating up. A notable 73,000 options are in-the-money, expiring with strikes up to $30. There's also significant open interest between $30 and $50 strikes, with a delta of around 0.4. This means market makers will need to hedge their positions, likely leading to increased buying pressure on GameStop’s stock.

One exciting point is the 75,000 open interest at the $128 strike price. Such high open interest at a far out-of-the-money strike shows that traders are betting on substantial upside potential. If market dynamics push the stock price closer to these higher strike prices, it could lead to a buying spree due to the delta hedging requirements of market makers. This situation, known as a gamma squeeze, happens when rising stock prices lead to more buying, further driving up the stock price.

The role of market makers and potential gamma squeeze

Market makers are crucial in managing risk by offsetting their options exposure through delta hedging. If the stock price rises and the delta of call options increases, market makers will need to buy more shares to hedge their exposure. This creates a feedback loop, adding more upward pressure and potentially leading to a gamma squeeze. Given the significant options expiring soon, the next couple of days could see heightened volatility and significant price movements for GameStop.

The most powerful force affecting stock prices is changes in a company’s future earnings potential, reflected in earnings estimate revisions. Institutional investors rely heavily on these estimates to calculate a stock’s fair value. For GameStop, any upward revisions in earnings estimates could signal an improvement in the company’s underlying business, pushing the stock higher.

In conclusion, GameStop’s recent financial moves, coupled with the upcoming options expiry and potential strategic actions by key stakeholders, create a highly dynamic situation. Investors should closely watch as these developments unfold, especially with the potential for a gamma squeeze adding to the excitement. The next few days are set to be pivotal for GameStop, potentially marking new milestones in this ever-evolving retail saga.