What Does GameStop’s Unusual Options Activity Say About Ryan Cohen’s Latest Plan for the Video Game Retailer?

GameStop (GME) had six unusually active options on Wednesday -- defined as a volume-to-open interest of 1.25 or greater -- including a Jan. 26 $12 put option with a Vol/OI ratio of 142.87, more than double the next highest at 68.34. 

CEO Ryan Cohen, the video game retailer’s largest shareholder, has a newish plan to deliver shareholder value. I’ve lost track of what iteration this latest scheme is since the Chewy (CHWY) co-founder first bought into GameStop in September 2020. 

On Jan. 15, TheStreet.com’s Bernard Zambonin reported that GameStop was shutting down its NFT Marketplace in February, about 18 months after launching in July 2022. 

It really shouldn’t surprise investors that this Hail Mary attempt to revive the company’s sagging fortunes didn’t pan out. Cohen might have successfully launched a pet-related startup, but this is an entirely different kettle of fish. 

The stock’s unusual options activity from Wednesday suggests investors have mixed feelings about Cohen’s latest plan to revive GameStop’s share price. 

It’s not a good one. Here’s why. 

The Bank of Ryan

For better or worse,  the interests of GameStop, Ryan Cohen, and RC Ventures are now entirely intertwined.

Bernard Zambonin, the same writer who alerted investors to the shutting down of GameStop’s NFT Marketplace, wrote a flattering piece on Jan. 12 about Ryan Cohen’s big bet on GameStop. 

I readily admit that I don’t spend too much time following the inner workings of GameStop, primarily because ever since Ryan Cohen’s been involved with the company, it’s been a Gong Show revival act that’s done nothing but evaporate market cap and waste more than three years that GameStop could have used to rightsize the business and make it profitable.

However, on page 16 of GameStop’s Q3 2023 10-Q, under the “Recent Developments” subheading, the company laid out its latest scheme to make GameStop relevant. 

“Mr. Cohen directs the investment activity of the Company in public and private markets pursuant to authority granted by the Board of Directors. Depending on certain market conditions and various risk factors, Mr. Cohen, in his personal capacity or through affiliated investment vehicles, may at times invest in the same companies in which the Company invests,” stated the company. 

In December, there was plenty of media fodder regarding the company’s Investment Policy change, so I won’t spend much time on it.

However, here’s what Zambonin had to say about the move:

“The recent modification to GameStop's investment policy conveys a clear message to the market: Under Ryan Cohen's leadership, the video game retailer is poised to spend its nearly $1 billion cash reserve on equity investments rather than its core business.”

He goes on to argue the move was astute, given the difficulties brick-and-mortar retailers face.  

Really?

Here Are 3 Reasons It’s a Dumb Move

First, if Cohen were half the investor some people think he is, he would have cut the physical store footprint by half in 2020 when he first got involved in this so-called turnaround. 

As Zambonin points out, 40% of the company’s operating leases expire in fiscal 2023, so it can cut its footprint significantly. While that will stem its expenses, it will also cut its cash flow tremendously. It will take the better part of a year to ascertain whether the decision is positive or negative for GameStop’s future profitability. 

Secondly, GameStop is not Berkshire Hathaway (BRK.B), and Ryan Cohen is not Warren Buffett. 

Anyone who’s followed the iconic holding company knows that Berkshire Hathaway’s most significant advantage is its insurance operations, which created billions in cash to invest from the float of those companies.   

“The brilliant thing about this strategy is that as long as the insurance business remains profitable, this is not only free money, it also effectively has a negative interest rate because Berkshire does not have to pay anything to use it to generate income from investments. If it were to borrow this money, it would have to pay an interest rate,” GuruFocus.com noted in 2021.  

The first part of the first sentence says it all. “The brilliant thing about this strategy is that as long as the insurance business remains profitable …”

Cohen now might have access to $1 billion cash. Still, it’s meaningless if the core operations aren’t consistently profitable in the future, and that’s before analyzing any investments made with this cash. 

A more accurate example of what Cohen is trying to accomplish would be Biglari Holdings (BH), which owns several companies, including Steak n Shake, which founder Sardar Biglari took over in 2009. It was losing more than $100,000 a day at the time. 

BH stock is up 26% over the past five years, compared to 76% for Berkshire Hathaway and 49% for Loews (L), another holding company I favor.    

Lastly, GameStop had $1.21 billion in cash and marketable securities at the end of October and $614.2 million in total debt for net cash of $595.3 million. So, he doesn’t have more than a billion to invest. It's more like $600 million, and that’s probably pushing it. 

If Cohen were the savior of GameStop, I would think he would be buying back GME stock, but there’s been none in the past 24 months. Instead, like a roulette table, he wants to spread his bets on anything other than GME. 

It’s clear he has no answers for the core business. It only took three years to figure that out. 

What About the Unusual Options Activity?

As I said in the intro, GameStop had six unusually active options on Wednesday. The Vol/OI ratios ranged from a low of 1.47 to 142.87. Four were puts and two were calls. Five of six expire a week on Friday, with the sixth a week after that. 

The highest Vol/OI ratio had a bid of $0.10 and an ask of $0.13. So, if you’re bullish on GME and sold a put, your annualized yield would have been 32%. Last October, despite being very skeptical about GME, I discussed why its put options were a potential income opportunity. That still appears to be the case. 

However, yesterday’s unusual options activity, combined with a put/call volume ratio of 1.31, suggests investors were very bearish about GameStop. Today, the bearishness appears to have subsided somewhat.   

Caveat emptor.

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