GameStop shares may be up 350%, but investors love the 50-cent options

Wild gyrations in GameStop Corp shares have roiled Wall Street all week with plenty of chatter about every conceivable angle, but some traders have honed in on one question:

For a stock that has rocketed about 350% in five sessions, why is the most hotly traded options contract at the 50-cent level?

Put options that pay out if GameStop’s shares fall below 50 cents within a year were the most popular options tied to the stock on Thursday, with nearly 33,000 contracts changing hands. The video game retailer’s stock closed down 44% at $193.60.

Some analysts said traders may be buying these puts in conjunction with other options contracts to take advantage of the rise in the stock's implied volatility -- an options-based measure of how much traders expect the shares to gyrate in coming days.

Also read: GameStop slugfest spreads as calls for probe build

GameStop shares have bounced between $42 and $483 over several days. The sharp moves have boosted the stock’s implied volatility and inflated the price of options contracts.

For example, 30-day implied volatility for GameStop shares is at about 540%, up from 170% a week ago, according to Trade Alert data.

Some traders may now be selling puts at these high prices, hoping to buy them back at a lower price if volatility falls, pocketing the difference, said Henry Schwartz, head of product intelligence at Cboe.

Also read: Traders return to GameStop plays as brokerages ease restrictions

Still, traders who sell a put without owning the underlying stock risk heavy losses if the shares move below the contract's strike price. Some brokerages do not allow customers to sell puts "naked," or without an offsetting position.

As a result, some traders may be buying the 50-cent puts, which are among the cheapest GameStop options, in order to sell puts at higher strike prices, a trade known as a spread. They could close the trade at a profit as long as volatility drops in coming days and weeks.

Also read: Here's what Elon Musk said to Reddit users 'punishing' Wall Street

"I am almost certain that it's people buying so that they can sell some of the crazy volatility in the other puts," Schwartz said.

Ophir Gottlieb, chief executive of Los Angeles-based Capital Market Laboratories had a slightly different theory.

Some traders who are able to sell options "naked" may simply be selling the 50-cent strike puts on a wager that even if GameStop shares retreat from their recent highs, they are unlikely to go to zero, he said.

GameStop's shares traded in a range of $2.60 to $22 months ago before their huge run-up began.

A put seller would get to pocket the premium as long as the stock stays above the selected strike price - 50 cents in this case.

"That might be one of the safest trades in the market today," Gottlieb said.