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Feb 26, 2021

GameStop heads toward best week in a month amid Reddit frenzy

The best way to short the market at the moment is through put options: Spruce Point Capital CIO


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​GameStop Corp. shares are on track for their best week this month amid a flurry of day trader activity.

The video-game retailer has jumped more than 150 per cent so far this week, despite erasing gains of as much as 31 per cent on Friday as amateur investors continued to promote the stock on social media platforms like Reddit and StockTwits. More than 39 million shares changed hands by noon, double what’s been seen in the past week, and adding to the 233 million that traded over the past two sessions.

“It would be unwise to discount the power of the collective retail trade and this is an example of the resurgence of energy either on GME again or through another stock,” said Amy Kong, chief investment officer of Barrett Asset Management.

The stock has been a poster child for volatility so far this year. Euphoria for the video-game retailer set off a 2,728 per cent rally last month before shares came crashing down and wiped out about US$30 billion in market value. The retail craze drew ire from Washington and led to a House Financial Services Committee hearing on retail trading and the video-game distributor last week.

Options traders were betting that the stock could do much better Friday after more than doubling so far this week. The most-active option traded on the stock Thursday was a contract on GameStop spiking to US$800 on Friday. Some 52,000 contracts changed hands during the session betting on this one-day gain of 636 per cent. The stock erased gains to fall 2 per cent to US$106.57 as of 12 p.m. in New York.

“From a top-down perspective, I would caution that these price spikes continue to signal frothiness in certain corners of the market and represent sharp deviations from company fundamentals,” Kong said.

Analysts cited a tweet by activist investor and GameStop board member Ryan Cohen posted shortly before the stock began its resurgence on Wednesday, suggesting Reddit traders may view the photo of a McDonald’s Corp. ice cream as a cryptic message to resume buying. A report from Citron Research suggesting the company purchase Esports Entertainment Group Inc. to pivot away from its declining retail business provided a further catalyst.

Even with the stock’s latest dip on Friday, shares remain about seven-times higher than the average analyst price target of about US$13, according to data compiled by Bloomberg. None of the eight analysts who follow the stock rate it a buy -- it has four hold-equivalents and four sell recommendations.

While the stock’s revival caught many on Wall Street flat-footed this week, the craze is “nothing like what we saw in late January,” according to Eric Liu, the co-founder of Vanda Research. “Part of that is due to a broadening of the opportunity set” with retail traders flowing into cannabis and crypto-exposed companies, he said in an email.