How to Trade on the Volatility of Chewy Stock Swings
How to Trade on the Volatility of Chewy Stock Swings
CHWY fell this morning after surging because of Keith Gill’s stock purchase
- Chewy (CHWY) volatility surged after Keith Gill’s stake in the company was revealed.
- But CHWY fell more than 6% through Monday morning’s trading.
- Stock and options volume is rising as meme traders move in.
Chewy (CHWY) fell over 6% through early afternoon trading following a 10% increase during the pre-market trading hours.
Keith Gill, aka Roaring Kitty, aka DeepFuckingValue, acquired about 9 million shares, representing 6.6% passive ownership in the online pet retailer, according to a filing with the Securities and Exchange Commission (SEC). The position is worth $233 million based on this morning’s price of 25.85 per share.
The purchase makes Mr. Gill the third largest shareholder of CHWY, according to FactSet. The filing revealed he owned the shares on June 24. Roaring Kitty’s X account posted a cartoon picture of a dog on June 27, which sent CHWY over 30% higher during Thursday’s session, although the stock closed in the red.
Gill under increased scrutiny
Gill is facing a class-action lawsuit from investors who are accusing him of securities fraud in a lawsuit filed June 28 in the Eastern District of New York. The lawsuit accuses him of orchestrating a pump and dump scheme in GameStop (GME) by using his social media accounts to manipulate the stock price, which underwent dramatic price swings.
GME fell nearly 9% today as traders speculated Gill may have sold some or all of his GME position to fund the CHWY purchase.
Gill hasn’t commented on the trade, leading many to speculate on why he would take such a large position in the company. Interestingly, GameStop’s current CEO, Ryan Cohen, founded Chewy. PetSmart (PETM) bought Chewy in 2017 for $3.35 billion, making it the largest e-commerce acquisition ever.
Trading CHWY after the surge in volatility
Chewy stock continued to decline through today’s session, adding to the stock's volatility. The implied volatility rank (IVR) was 81.2 today, a substantial increase from mid-June when IVR hovered around the 20s and 30s.
Over 40 million shares traded hands in the first few hours of today’s trading, a significant increase above the daily average volume of about 4 million shares. Options volume was elevated as well, and even far out-of-the-money (OTM) calls saw a lot of volume. The 58 call for the July 5 expiration had volume nearing 5,000.
To traders who are looking to take advantage of the elevated premium, selling a call spread or a put spread is a viable option, depending on your directional bias. An iron condor is suitable for those with a more neutral bias.
CHWY hasn’t closed below 22.5 since June 14—before the stock experienced several strong upward moves. That said, a short put vertical spread for the Aug. 16 expiration with the short put positioned at 22.5 and the long put positioned at 20 offers a probability of profit (POP) of 63%, with a max profit of $84 and a max loss of $166. A decrease in volatility would help this position, assuming CHWY stays above 22.5.
Thomas Westwater, a tastylive financial writer and analyst, has eight years of markets and trading experience. @fxwestwater
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