Less Dumb Investing

As we kick off Q3 2024, the financial markets are abuzz with the latest moves by Keith Gill, the investor famous for his role in the GameStop saga. Today, Gill made headlines again by exiting his position in GameStop and shifting his focus to Chewy, the online pet supplies retailer led by Ryan Cohen. With an actually hilarious 13F, Gill announced that he owns about 9 million shares of CHWY, giving him a 6.6% stake.

Right now the time is 10:30 a.m. CST, so I’m writing this without a view into the future. The price of CHWY stock is $25.58, down about 6.2% from Friday’s close. The stock hit a price of $32.72 in premarket trading and opened at $30. That was an initial premarket move of 20%.

And now the stock is down 6% today. This is a pretty incredible setup for covered calls. CHWY was not a real player in the meme stock euphoria. The stock did move when Roaring Kitty posted a dog on Twitter on June 27th, gaining 36% to hit a high of nearly $40, but it didn’t last. The stock would close on June 27th only marginally up.

Which leads us to where we are right now. The price of roughly $25 to $26 a share is about where we were prior to Gill’s initial Twitter post. Wall Street analysts have a target price of $25.93. That’s right about where it’s currently trading. This isn’t GameStop, but it has a GameStop-quality: extremely high volatility.

CHWY’s option volatility is currently extremely elevated. I’m going to recommend a simple strategy: unleveraged covered calls. Purchase 100 shares of CHWY at market, then sell a covered call in the $27.50-$29.50 range.

Looking at the image below, we can see that a July 05 28C trades for roughly $0.79. With an IV of 150%, it’s a brilliant sell. Theta per day is 19 cents. If CHWY goes above $28, that’s great for you. You collect that $2.50 of delta move + the premium from selling the option; sure, you may leave some value on the table, but it makes up for it on pure IV.

There’s not a lot to write on this covered call strategy. Unlike GameStop, you are unlikely to take a lot of pure delta risk by going long stock and selling a call. CHWY will likely not drop 20% on any given day from this level, as it has the advantage of being an actual viable business. You can recapture close to 4% of initial exposure with at-the-money options. It’s also a holiday week, so there will be reduced theta exposure.

It’s also likely going to be short-lived. CHWY is not a meme stock. Its volatility is dependent on how much Roaring Kitty is invested and memes; based on today’s price action, I wouldn’t be surprised if he’s already liquidated. A 13F requires no commitment to hold for an extended amount of time. Keith Gill’s only obligation to Chewy’s shareholders is to disclose a position, not its duration.

So take advantage of it while you can. It’s a beautiful setup, but it’s short lived.