Shares of GameStop (GME) have climbed another 70% today after climbing 70% yesterday as well.
Meanwhile, shares of AMC are up another 40% today after climbing the same amount yesterday.
But like we discussed yesterday, GameStop’s sales haven’t increased in any notable way. Neither have AMC’s.
People aren’t suddenly lining up around the block in front of GameStop’s to swarm the video game retailer. Nor are people heading to the movie theater in droves.
We aren’t witnessing any real action in the underlying businesses for these meme stocks. What we are witnessing is essentially rampant speculative gambling.
We have mass amounts of capital — both retail and institutional — shoving money into one asset for a day or two… Then the money disappears and flows into something completely different the next day! Again, not based on a fundamental cycle or trend… Just based on speculation.
This is different than typical day trading because it’s not systematic high-frequency trading living within a natural cycle (in other words, it’s not day trading that lines up with a broader picture).
What we do is considered swing trading. For those that need a refresher, swing trading involves making trades that profit from short term price changes that last from days to weeks.
Swing trading positions are held longer than day trading positions but are held shorter than traditional buy-and-hold investment strategies that involve holding investments for months or years.
Think of swing traders as medium-term investors. The majority of what I do in my services would be considered swing trading as I like to find several day- to several week-long opportunities and ride momentum.
The rampant daily speculation we are seeing right now is making it especially hard for swing trades, because we lack any consistent “follow through”… We’ve been talking about this for weeks, but now you are really seeing it come to pass with meme stocks taking center stage just days after Apple (the most opposite stock of a meme stock on the planet) was at center stage.
Things are shaking up more quickly than we’ve seen since 2020. Just a few weeks ago, we saw Tesla (TSLA) rally over 50%, while it’s now down over 10% from the highs.
So how does that actually happen? Well, it’s the impact of extremely large sums of capital pouring into specific assets and then drying up In the span of a day or two.
We are missing the consistent cycles that make trading the medium term ideal.
The Crazed Day Traders
These crazed day traders don’t care about the confusion we are seeing in the market today. They don’t care about any single asset. They don’t care about any single sector. Nor do they give any consideration to the plethora of economic data points being released this week.
And they especially don’t care about the follow through behind the underlying stock they are investing in.
Now, to be clear, I am not saying there’s anything wrong with that approach. You can trade within a tight timeframe and ignore the longer term momentum I typically use and do very well. There’s nothing to say one shouldn’t do that…
The point I am making is that when it becomes “crazed”, it breaks down the longer term consistency we’d typically see in momentum cycles.
What we are seeing is floods of capital bouncing around from one stock to the next. And with the resurfacing of the man spearheading the meme stock craze in 2021, Keith Gill who went by “DeepF***ingValue” on Reddit and “RoaringKitty” on YouTube, we have seen the amount of capital greatly intensify and pour into the original meme stocks. (Next on his list is a new crypto called Kitty.)
When this amount of capital is bouncing around (and causing stocks to move fast) we should pay attention to it. Because volatility equals opportunity.
GameStop and AMC
Today’s meme stock rally is missing one key ingredient compared to the 2021 meme stock craze.
Call option volume is just 1/10th of what it was back in January of 2021 and the opening price for GameStop today ($64) was higher than the most popular options strike price ($57). So investors already made their payday as of open this morning.
As shares have surged and traders snapped up short-dated call options, sellers of these options contracts typically hedge their positions by buying the underlying stock, which then adds more fuel to the rally (because they are buying shares as a hedge but adding capital inflow to the stocks).
Nearly 700,000 options contracts have changed hands since Monday. That’s the highest number since 2022.
In 2021, we saw the same dynamics (outsized call buying and crazed euphoric stock trading). But what’s different today is the magnitude. In other words, we’re not seeing nearly the total volume or the demand for higher and higher call options that were being scooped up the last time meme stocks went on an incredible run in 2021.
In fact, it’s worth noting we have already blown past the strike price of the options with the largest open positions. With the most active option being a $57 call that expires this Friday.
That doesn’t set us up to roll into the spiral we saw in 2021. Remember, the traders who sold these calls have likely bought shares already which reduces the risk of an event like this happening again. This means that the extremely bullish traders have already made their money and are sitting happy and the shareholders who are hedged will likely begin to unload shares once the majority of options expire.
I think one of the reasons we’re seeing so much hedging (which actually added to the initial run on GME and AMC) is due to the history lesson that’s still fresh to much of Wall Street. The quantitative funds and hedge funds still remember how hard they got crushed just three years ago and they’ve made sure to cover their short positions very early on.
And according to the head of equity derivatives strategy at TD Cowen, these quantitative and hedge funds are likely participating on the side of the meme stock traders leaning into the squeeze and will likely be the ones exiting the trades for high profits ahead of the retail traders.
In summary, I think we should expect a much more abbreviated version of what we saw in 2021 here. (If you’re buying puts, consider buying 2-3 weeks out rather than into the short term expiration so you get the benefit of folks unloading shares.)
To your success,
— Nate Tucci
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