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GameStop Extends Gains but Meme Stock Rally Spark Remains a Mystery

GameStop had an unexpected surge in late Tuesday trading, leaving investors struggling to find a reason for the strongest meme-stock rally in more than two months.

GameStop  (GME) - Get GameStop Corp. Class A Report shares moved higher Wednesday, alongside gains for AMC Entertainment  (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report, as investors scramble to find clues behind the strongest rally in so-called meme stocks in more than two months.

GameStop soared 27.5% Tuesday with 14 million shares of the money-losing video game retailer change hands -- more than 5.8 times the 20-day average -- in a wild afternoon session that sparked similar rallies for fellow-meme stocks AMC Entertainment, Koss Corp.  (KOSS) - Get Koss Corporation Report and Clover Health Investments  (CLOV) - Get CLOVER HEALTH INVESTMENTS CORP Report

While no specific catalyst for the Tuesday rally has emerged, a stronger-than-expected second quarter earnings report from electronics retailer Best Buy  (BBY) - Get Best Buy Co., Inc. Report, which also raised its full-year sales outlook, may have provided GameStop investors with some bullish ammunition.

Action in the options markets, as well, were noted as a possible driver for yesterday's moves, with increased activity reported at strike prices of $40 and $50 for those linked to AMC shares. 

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A call option buyer has the right, but not the obligation, to own shares of a company at a certain price at some specified point in the future. He or she might think owning a call option on GameStop with a $50 strike price, when shares are trading at $46, is a better way to play the stock's momentum.

Options sellers, meanwhile, will often buy the underlying stock in the open market as its price moves higher, in order to hedge their risk, creating a virtuous, but potentially ephemeral, circle of ever-higher prices.

GameStop shares were marked 2% higher in late-morning trading Wednesday to change hands at $214.22 each. AMC shares jumped 5% to $46.45 each and Koss Corp slipped 1.2% to $19.17 each.

GameStop posted a second quarter loss of 45 cents per share in June, while unveiling both plans to sell 5 million shares and a request from the U.S. Securities and Exchange Commission for documents linked to an ongoing investigation concerning "trading activity" in its shares and those of other companies.

Earlier this month, AMC posted a narrower-than-expected second quarter loss and hinted at a possible partnership with GameStop, with CEO Adam Aron suggesting the group could return to the black in the fourth quarter, thanks in part to the same themes that drove the second quarter recovery: increased film attendance, rising average ticket prices, soaring food and beverage sales and an improving company balance sheet.