If you keep up with financial news – or just news in general – I’m positive that you’ve heard the name GameStop in the past week.
That’s largely due to the company’s stock hitting a high of $404.43 – up from the 52-week low of $2.57.
Now, if you’re not familiar, GameStop can be equated to a Radio Shack or Blockbuster – it was a place that I’d take my son back in the day where he could pick out video games or where we could sell them back once he beat them.
Today, people can buy all of their games online and download them directly onto their console – rendering GameStop essentially obsolete.
And that’s exactly why these moves are shocking to investors.
GameStop has been on the decline for years. In 2018, the stock had an average trading price of $14.82, dropping almost 50% to $7.55 in 2019.
And it really took a hit in 2020, when the company did nothing to adapt in the face of the pandemic, the stock dropping to less than $4.00 per share.
In a time that people weren’t visiting shopping malls and going into stores, that’s when this company saw massive declines.
And investors started to pay attention.
Hedge funds and traditional investors alike saw this opportunity to profit and ran with it – people started “shorting the stock,” meaning they were betting on the stock going down and pocketing major cash.
Well, for one reason or another – and we can all speculate – people on popular social media sites Reddit and Tik Tok took notice and took action.
They started buying GME like crazy, making the price skyrocket literally overnight.
Between Tuesday and Wednesday, GameStop’s market value jumped over $10 billion…
And with Redditors beating Wall Street at their own game, it’s just adding fuel to the fire.
Hedge funds are being forced to buy back their losing short positions – make the stock price shoot even higher.
And it’s not only GameStop. There are several companies that investors are shorting that the internet is trying to “save.”
The volatility is high – and this fanning-of-flames won’t last forever. But there’s a profit opportunity at stake…
One that doesn’t involve buying these on-fire names.
With these two low-risk strategies, you won’t get burned when the bubble bursts…
How to Profit on the Reddit-Inspired Rise in Fundamentally Poor Stocks
The Reddit community has banded together to create extreme buying pressure. This is driving these stock prices up – way up.
And as the price rises, short sellers lose money on their positions, which in turn means these investors have to buy back their positions for a loss.
Here is a list of the highest short interest ratios and targets for the retail trader community.
Although these numbers look daunting, it’s pretty simple: when buying pressure kicks in, stocks go up.
The higher the stock rises, the more money these investors lose. To cut losses, short sellers must buy back their positions to close them creating even more buying pressure adding fuel to the fire. This is called a “short squeeze”.
All of this creates extreme volatility in the stock.
Take a look at GameStop (NYSE: GME) over the past few months:
On the original gap up, volume was over 144 million shares. Average volume is six million. On January 12, 2021 GME
was trading at $20. Five days later, the stock hit a high of $380, a 1900% rise.
And Redditors aren’t only targeting GME.
Another stock that is facing this same volatility is Blackberry (NYSE: BB).
As you can see in the chart, BB
has faced a major spike that started around January 14. This company hit a 52-week low of $2.70 and it is currently trading at $25.10 at the time of writing.
Let’s also take a look at AMC Entertainment (NYSE: AMC).
In the chart above, you can see how AMC
has traded mostly flat up until January 27. AMC
hit a 52-week low of $1.91 and just hit a high of $20.36.
So, what do we do with these stocks?
To answer that, consider that the volatility is extreme. These stocks have moved in huge trading ranges.
For example, on January 27, 2020, GME hit a high of $380 and a low of $249 – a $131 range.
Directional risk is extreme, which means that traditional trading systems don’t work in this environment. Trading the stocks is way too risky.
That’s why this is a great opportunity to buy options.
Options contracts will keep your dollar risk low and have a reasonable chance of making some money.
Here are the top two ways to play these controversial companies:
- Sell a way Out-of-The-Money (OTM) Short Put Spread.
For example, with GME currently trading at $325, you could today sell a Feb 26, 2021 GME $20 Put and buy a Feb 26, 2021 GME $15 Put for about $1 and risk $4.
GME was trading at $20 prior to this spike. Once this “party” is over, the stock will likely retrace and stay at or above $20 for the next 30 days. This trade will expire worthless leaving you with a 20% profit.
- Sell an At-The-Money (ATM) Short Put or Call Spread
To be clear, you have about a 50/50 chance of making money on this strategy. Basically, this is about selling a spread and hoping for the best, a bit like “betting on the black” in roulette. Keep your risk to reward around 1 to 1, meaning risk $1 to make $1.
As I write this, you could sell a Blackberry (NYSE: BB) Jan 29, 2021 $23 put and buy the BB Jan 29, 2021 $22 put for $0.65 and risk $0.35. If BB is at or above $23 on Friday, the options expire worthless and you pocket a 185% ROI.
Trading anything on these Reddit-targeted stocks is playing with fire. But if you want in on these massive stock moves, this is the best way to make money using low risk options contracts.
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