Return of the Meme

 Hey Traders,

They’re back, baby!

In case you thought things were getting a little too quiet …

Meme stocks are back with a vengeance!

(Though really … they never totally went away to begin with …

Just ask my Robinhood Traders who have been playing AMC Entertainment (Ticker: AMC) like it’s our job the last few weeks …)

This week brought another major pop for the two OG meme stocks …

And there’s a new kid on the block that’s making some major money moves … 

Support.com (Ticker: SPRT) is the newest meme mover, and by hopping on the meme train early, I was able to score a 231% total gain in just two days!

Here’s how I did it.

I Support This Meme

Now the real news of the week (no offence, AMC and GME) was the new meme on the block: Support.com (Ticker: SPRT).

The cloud company went gangbusters on Friday, popping from Thursday’s closing price of $19.98 to a mid-day high of $59.69, before closing around $26.33 on some heavy selling volume.

Chart courtesy StockCharts

Once again, we’ve got short sellers to thank (or blame, depending).

With over 60% of SPRT’s float sold short, the stock was a prime candidate for retail traders to try and force their next short squeeze.

Let’s take a minute to review how this works.

When you’re shorting stock, you’re selling shares you don’t own.

Somebody needs to own those to cover your play, so your broker will match your short sale with someone who is willing to let you “borrow” the shares.

Of course, your broker isn’t doing this out of the goodness of their heart – you’re going to pay for their trouble (a “short rate”). A short rate isn’t a flat, fixed fee – rather, it’s based on the scarcity of the shares, and the amount of time that you’re borrowing the stock for …

For example, you may be charged per day that you’re “borrowing” these shares by holding your short position.

In stocks with heavy short interest, there are fewer shares available to borrow, making the stock “hard to borrow” (HTB). Accordingly, the high demand and low supply causes the hard-to-borrow shares to be more expensive to borrow.  

SPRT’s borrow rate is, frankly, insane – on Thursday, I calculated that it would cost me 195% the cost of the shares per year to hold a short position!

Now, when these “hard to borrow” stocks start to move against the shorts is when things get really interesting.

If the person “loaning” the short seller their shares decides they no longer want to do so (such as if they want to sell their stock), the short seller will need to cover their short position, often by buying their own shares of the stock.

So if a stock moves higher, and the person who is “loaning” the shares wants to sell, this means the short seller needs to buy shares to cover their position.

But remember … these “hard to borrow” stocks have a low supply to begin with, so the increase in demand from the covering serves to push the shares even higher still.

Forcing more shorts to cover …

And of course, when a stock is moving higher, retail traders and the like will also want to buy shares too, further exacerbating the competition for the already-low supply of shares!

Ladies and gentlemen, your short squeeze has arrived!

This is what we saw on Friday,

In the pits, option volume set a record at 587k contracts crossing the line, and calls volume exceeding put volume by 1.6-to-1.

Implied volatility (IV) was also at an annual high. In the September contracts specifically, IV was a whopping 350%, so traders are really paying a premium to trade SPRT options.

This was all rather unexpected – in fact, the options action was so unprecedented that market makers actually had to introduce new strikes on multiple occasions this week!

With the shares only trading around $10 last week, this week’s pop has caused market makers to scramble in an attempt to offer the now-demanded higher strikes as SPRT has rocketed higher. First the 24 through 30 strikes were offered, and after Friday’s pop, you can now purchase options up to the 85-strike.

And believe me, options traders took advantage!

I would just like to take a moment to point out the trading volume on the front-month 39-strike calls during their first day of trading …

And I would also like to casually point out that the front-month 75-strike calls saw almost 9,000 contracts cross the tape on Friday as well …

It’s very possible that this squeeze isn’t over yet, guys, and options traders are placing their bets accordingly.

I’ve already made a pretty penny on SPRT.

In my Robinhood Trader program, I bought 2 contracts of the SPRT 15-23 call spread for $1.05 …

I sold the first at $2.20 … a 110% gain

And closed out the second for $5.10 –  a 386% gain!

In total that spread paid out 231% … in TWO DAYS!

And we are not done yet with SPRT.

Hey, that’s the kind of thing that happens in Robinhood Trader  …

Between my Gamma Radar, which detects unusual trading volume from both the institutional and retail trader side, and a hot tip from one of my members, we were quick on the draw …

And it paid off in a big way.

Don’t be surprised to see me play this again in the coming days.

If you’d like to come along for the ride, click here.

GameStock

And of course, we have to mention GameStop (Ticker: GME), the original meme stock.

After being targeted by Reddit retail traders for a short squeeze earlier this year, the shares have held on to a surprising amount of their upside – though they’re far below their $483 peak, they’re still well above their pre-meme level near $15 (on a good day), having not broken below $116.90 since March.

Chart courtesy StockCharts

Quite frankly, I’m impressed (but don’t expect to see me buying GME shares anytime soon).

This week, GME saw another influx of heavy buying volume, propelling the shares to a high of $227, before retreating to close the week at a respectable $204.

In the pits, call volume was significantly heavier than usual with nearly 122,000 contracts crossing the tape on Friday. While that’s more than 192% of GME’s typical daily call volume, it’s still significantly less than the 220,000 call contracts that crossed the tape during the initial pop on Wednesday. However, put open interest still exceeds call open interest at a ratio of nearly 2-to-1.

A fair few options traders are still targeting out-of-the-money (OTM) calls on GME. Looking ahead to the next expiration on September 3, the 300-strike call has the most open interest, and saw the highest volume traded of the September 3 term options on Friday.

With a delta of 8, I can roughly estimate this option has an 8% chance of finishing in-the-money, making it an interesting choice …

But then again, it is a meme stock!

With both GME and AMC (which we’ll look at in just a minute) I think there’s several ways to play these names for profit: you can try to play the pop (if your timing is right), or play the fade.

Personally, I think the near-term upside has likely come to a head, and I’d be looking to fade GME on its way back down to earth.

However, as much as I’d like to fade this name, I may be holding off for now. Options are expensive, and unless I find a really compelling spread trade to help ease some of the cost, I’m not sure if it’s worth it to me to buy in at just this moment.

Given how unpredictable these names are, I’d recommend you strictly adhere to your best money management guidelines if you’re thinking of dipping a toe in the options pool.

Are You Not Entertained?

And of course, AMC is another original meme stock flying high this week, with the shares catching quite a tailwind on Wednesday, thanks to heavy buying volume.

Chart courtesy StockCharts

Though they couldn’t hold onto all of their upside through the close on Friday, the shares did finish the week in the black, holding above the round $40 mark through the close.

Looking into AMC’s pits, call open interest exceeds put open interest at a ratio of 1.3-to-1, and looking specifically at the September 3 term options, once again I’m seeing out-of-the-money calls appear to be targeted.

And that includes some really OTM strikes …

This is another name I expect to fade. These meme stocks are great when they rally, but they fly too high, too fast, and I think playing the downside is the way to go on this one.

At this point, I would opt to put a spread on, because I just think the price of options are too high to buy straight calls or puts.

The exception would be if I was able to find a put that is sitting out of skew – in other words, a put that is priced too ‘cheap’ relative to the price of puts around it.

Yesterday, I was particularly interested in the September 3 41-strike straddle, which would have cost me just over $6.

Remember, with stocks like this, the key is always to practice smart risk management, and never sink more into a trade than you can afford to lose.

And of course, I’m always over at Robinhood Trader trading the pops (and drops) before they happen …

You can check it out right here.

Your Only Option,

Mark Sebastian

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