One of our SpreadHunter customers recently asked about the best way to bet against high flying Meme Stocks. He was especially interested in the rapidly deflating stock GME and how to make money if the decline continues.
As usual, our advice is to “comparison shop” and look at the relative risk/reward of various spread combinations.
Short call verticals offer a great way to bet against a declining stock with defined risk. Here is the option matrix for GME options expiring on July 5, 2024, a bit less than one month away.
As you look up and down the Call Option Chain, the prices are almost identical as the strikes go up. This is typical of volatile securities, where the options skew forces the spread prices to be almost identical over wide ranges of strikes. Because of the skew factor, sellers of higher strike (lower risk) spreads receive almost as much money as sellers of closer-to-the-money spreads, which have much higher risk.
Moving to the Put Side, we observe similar behavior in the Long Put Vertical Spreads. This suggests that it is better to buy closer to the money spreads that cost only a bit less than riskier spreads that are further out of the money.
Out-of-the-money Short Call Verticals have a big advantage over Out-of-the-Money Long Put Verticals in that they make money if the stock stays flat, whereas the Out-of-the-Money Long Put Verticals lose 100% of their value if the stock does not decline below the top strike.
Needless to say, every situation is different. But the two examples above provide a starting point for evaluating ways to take advantage of this type of situation.
Note: The information in this post is for education and informational purposes only and does not recommend buying a security. The Nuclear Option Substack is not responsible for any trading losses or other adverse events based on content in this article.
Before trading options consult your financial advisor and read the booklet Characteristics And Risks of Standardized Options contracts available from The Options Clearing Corporation.