Meme stock? What’s a meme stock? That’s what I said when I first heard the term.
The Merriam-Webster dictionary defines “meme” as:
- An idea, behavior, style, or usage that spreads from person to person within a culture.
- An amusing or interesting item (such as a captioned picture or video) or genre of items that is spread widely online especially through social media.
If you’ve ever been on Facebook or any other social media platform, you’ve seen memes. And probably shared a few yourself.
Memes work on a viral scale. They spread from person to person and infect massive social networks, often with no real rhyme or reason as to their popularity.
Meme stocks work the same way. Internet warriors – mostly on Reddit – popularize crappy stocks over social media and pump up buying power consensus to drive them up to astonishing levels. The icing on the cake is that they target companies with a large amount of institutional short interest.
As these stocks rocket up, institutions are forced to buy their short positions back to avoid huge losses, adding more buying fuel to the fire… which can and does kill whole hedge funds.
Naturally, you can also make a ton of money on these meme stocks – if you know when to get in and how to get out.
Fortunately for me (and you), I have a scanner-heavy strategy that works marvels…
How Volatility Fuels Meme Stocks – And Works in Our Favor
One social media platform that has popularized basement stocks on the verge of bankruptcy is Reddit, a predominantly millennial and Gen X community. They have created the meme effect on stocks like Gamestop (NYSE: GME), AMC Entertainment (NYSE: AMC), and Blackberry (NYSE: BB).
That’s right, a brick-and-mortar video game retail store, a theatre company with no one in seats, and a prior manufacturer of defunct mobile devices amongst other businesses that aren’t working.
You’d think these stocks would be dead in the water, and initially, you’d be right…
Back in January when the Reddit community first came on the scene, Gamestop (NYSE: GME) was trading in the mid-teens. Then “wallstreetbets” gave it the viral treatment.
A few weeks later, GME hit $483 and on that same day had a low of $112.25, a $370.75 daily range. Crazy!
A few weeks later, it was trading down around $50.
This strategy is very effective at driving stocks up to meteoric levels, but like musical chairs, the last person standing is going to get hammered as the buyers are exhausted and these high-fliers come crashing down. Imagine being a buyer at $483 and selling your position at $50. Mommy!
To say that meme stocks are volatile is an understatement. These stocks move at the whim and fancy of a largely inexperienced community.
Volatility is not always a good thing for stock traders, but it most certainly is for options traders. There is always a limited-risk way to grab easy profits with options.
My Low-Risk, High-Profit Meme Stock Strategy
Here’s one of my favorite strategies for profiting on meme stocks. The basic strategy is to sell option spreads where I don’t expect the stock to be in a handful of days.
- Short-term credit spreads (<= 1-week to expiration).
- Sell credit spreads 30% OTM at Support and Resistance
Here’s an example:
On June 21, 2021, after shooting up from the mid-teens to $72.62 in a heartbeat, AMC had formed a two-week channel between $40 support and $70 resistance.
Given two weeks of channeling and with option premium elevated, the idea is to sell credit spreads roughly 30% away from the stock price and preferably at support and resistance. If the stock doesn’t reach the credit spread, the spread expires worthless, securing the credit received.
Both $40 support and $70 resistance are about 30% away from AMC trading at $55.
Credit spreads are built as follows:
Bearish Credit Spread (Bear Call Spread)
- Buy higher strike Call
- Sell lower strike Call
Bullish Credit Spread (Bull Put Spread)
- Sell higher strike Put
- Buy lower strike Put
As the word “credit” implies, these trades bring in a credit. The risk is calculated by subtracting the credit from the width of the spread. They have lower return on investment (ROI) potential in exchange for high probability.
Given the stock can move fast, we don’t want to be there very long. So, use options that expire within a week.
Following these rules, here are two trades you could have done on Monday, June 21:
AMC June 24 $40/$35 Bull Put Spread
This trade brought in $33 on $467 of risk, a potential 7.07% ROI within 5 days. That doesn’t sound like a lot of ROI, but when you consider it’s realized in 5 days AND that you have a 99.1% statistical probability of making it, it’s a fantastic trade.
Where do I get the probability? My tools calculate it.
AMC June 24 $70/$75 Bear Call Spread
This trade brought in $56 on $444 of risk, a potential 12.61% ROI within 5 days. Again, a nice profit for a 5-day trade, especially considering 95% statistical probability of profit.
Here’s the best part… you can do BOTH trades and create an IRON CONDOR (two credit spreads).
AMC June 24 $35/$40/$70/$75 Iron Condor
This AMC iron condor brings in $89 credit on $411 of risk with a 94.6% statistical probability of profit in 5 days.
In all cases above, if the stock doesn’t cross the short strike, the spread that you sold expire worthless and yield max profit.
On June 25 expiration day, AMC closed at $54.06 and each of these trades expired worthless.
Now, to be clear, AMC could have crashed to $20 or rocketed up to $100 leaving you at max risk on the losing trade (or losing side of the iron condor).
So, you must be ready to exit should the stock break out.
The simple exit rule to avoid maximum risk is to exit the losing credit spread should the stock break above or below the short strike.
For bull put spreads, this means that you close the spread should the stock break BELOW the short put strike.
For bear call spreads, exit should the stock break ABOVE the short call strike.
As you can see, this strategy gets a little involved.
Which is why I’ve built a research service that does all the heavy lifting for you…
While meme stocks are hot at the moment, any expert with an ounce of sense would tell you to refrain from allocating your entire portfolio there.
The real prize is in taking advantage of consistent, replicable trade patterns in positions you’d like to own for the long term.
Enter my Rocket Wealth strategy…
Using my controversial method, I’ll show you exactly how to score better prices for the top blue-chip stocks… something previously reserved only for the global financial elite.
And at the time of writing this, members had the opportunity to profit on 55 out of 57 closed trades since April 2020 – that’s nearly perfect!
So, to see how my most successful wealth building strategy works, click here now.
Talk soon,
Tom Gentile
America’s #1 Pattern Trader, Power Profit Trades
