According to the Stock Blog post, Options Action: Dangerous Videogame Play, what must happen for the break-even trade?

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According to the Stock Blog post, Options Action: Dangerous Videogame Play, what must happen for the break-even trade? 

Answer: stock must drop more than 8%

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Options Action: Dangerous Videogame Play

This post was written by OptionMonster's Chris McKhann.

Options traders on Monday are betting against GameStop, which has been in consistent decline for the last six months.

The videogame retailer's stock is up about 9 percent from its low of $21 last week — but still nowhere near its highs of nearly $60 in mid-April. Options action today indicates that traders believe the shares will break back down below those low levels by the end of the week.

They are using a bearish put spread, buying 3,000 of the November 22.5 puts and selling an equal number of the November 20 contracts. The debit of $1.35 was offset by the credit of $0.45, for a net debit of $0.90 on the $2.50 spread.

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The volatility data shows an unusual pattern that enforces the reasoning for this spread, as does the short time frame. The implied and historical volatility have moved in lockstep, and both have climbed to new highs around 110 percent.

Still, the stock will need to drop more than 8 percent by the end of the week for this trade just to break even.

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GameStop competes with:

Amazon.com

Walmart

Best Buy

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Jon 'DRJ' Najarian is a professional investor, CNBC contributor, and cofounder of OptionMonster.

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