By: Steve Smith
As discussed last week, Meme stocks came back into play and the activity has accelerated into this week. The big 3 MEME names continue to be GameStop (GME), Blackberry (BB), and AMC (AMC) — with momentum hitting full-force category 5 hurricane levels. AMC was actually just halted as I type; up 85% on the day and about 250% in the last 4 trading sessions.
Many readers have inquired about the best way to trade these Memes.
I no longer play in the sandbox of sardines disconnected from any reality. Firstly, I don’t want to be stuck in front of my screen staring at charts and blinking lights all day. I’d rather be spending time doing some research, and frankly, I was never so good at momentum trading. Even when I was in my 20’s and worked on the CBOE trading floor during the dot.com craze, I didn’t really get caught up in the frenzy. Rather, I tried to short what was obviously a bubble, realizing that was a losing proposition taking advice from the computer in the movie War Games, “the only way to win is not to play the game.”
My approach, and what I apply to Options360 Concierge Trading Service, is finding setups with proper risk/reward parameters, stepping away and letting the positions play out, making adjustments through time and price. Basically, grinding it out is what works for me in terms of both delivering consistent profits and allowing for a less intense lifestyle.
But, just because it’s no for me doesn’t mean that others shouldn’t or can’t be successful actively trading these Meme names. And since most people are using options which is my domain, here are three pieces of advice.
- Be prepared to constantly monitor and actively trade. This is a purely speculative endeavor, which at some levels, is all trading /investments, and doesn’t get too opinionated. I’d say to try to rely heavily on technical analysis. However, when things go parabolic, levels get thrown out the window. Hence, make sure to employ risk management, meaning both to take profits and limit losses. If you want to play the YOLO out-of-the-money option game, that’s fine. Just keep the positions right-sized. To my mind, no more than 5% of the total portfolio to one position. Therefore, if it doesn’t pan out, you can always come back to fight another day. If you’re right, given the highly levered nature, these relatively small positions will produce outsized profits. In other words, book the gains and keep moving.
2. Take your profits. This concept of ‘diamond hands’ or HODL is ridiculous; we’re involved in the markets for one purpose, to make money. If you want to prove how tough you are, go outside and find an actual live bear to fight.
3. Make sure you have a good understanding of options pricing behavior and the dynamics the options market is having on the underlying stock. The volatility both real and implied in AMC, GME, BB etc are in the stratosphere; IV levels for these stocks are in the 300%+ level, meaning they’re pricing in moves of 25%-30% for a single day. Don’t get sucked into thinking these fat premiums offer free money to a seller of options. Again, the AMC move today is a perfect example; when the stock opened around $38 this morning, the June 4 $50 strike call, a 30% move, was trading around $1.50. With the stock now reopening at $67, the calls are trading $25 per contract — a reminder, to never sell a naked or uncovered option.
On the other hand, the incredibly high implied volatility also means that skew or the difference between price across different strike and even time frames remains relatively flat, as everything moves almost in unison. This makes using spreads to profit from short-term trades difficult. You’ll need to buy a put or call outright to participate in short-term price swings. Again, keep the position size appropriate to manage risk and be ready to “trim and trail” to book profits along the way.
I can dig in deeper at a later date, and maybe rant about how the exchanges by listing new call strikes 50%, or even 100% OTM with just days until expiration is complicit in these “gamma squeezes,” but, I have to get back to my more conservative research.
And by conservative, I mean Options360 Concierge Trading Service members profiting 45% in an overnight AirBnb (ABNB) profit! Today, we added a new position in JD.com (JD) using a similar strategy, a ratio spread, on expectations JD will clear $80 within the next week or two. If so, the position should deliver around an 80% profit.