Options Arena: Gun to Your Head, Trade a Meme Stock
I had a wild idea for this week’s Arena…Pardon the morose imagery, but we’re doing a “gun to your head” challenge. I asked our True Options Masters — imagine you HAVE to put $100k into one of five “meme assets.” Which one do you pick and why? The strategy is entirely up to them. But they have to trade $100k, and have to close out the full position by the end of the year. The stocks?
- Gamestop (GME)
- AMC (AMC)
- Virgin Galactic (SPCE)
- Dogecoin (DOGE)
Normally everyone aside from Chris wouldn’t so much as touch any of these names. So it was fun to see how each would approach such a volatile trade.But before we get to it… Yep, Amber won again. Poor fellas.
BUT, the walls are closing in… The competition is heating up!Let’s see how our Masters fare in today’s Arena!
Chad: Sorry Chris, but DOGE Is a No for Me
Well, I think we all know what Chris is going with…AMC is an okay bet, because the stock has come back to reality and is set to head higher from here. Can’t say the same about GME or DOGE (sorry, Chris) — so I’d skip those. Personally, my favorite of these is Virgin Galactic. It’s not so much a meme stock as it is a futuristic play on the space race. And I like what I’m seeing on the chart below. Taking a monthly look at each of these stocks with my Profit Radar, we can see that SPCE is set to turn the soonest and see the biggest run through the end of the year. It also happens to be a buy on the weekly Profit Radar, so that sets up nicely with jumping in today. I’d place a big money trade on the January 20, 2023 $15 calls for about $1.40.
Mike: AMC Jumped the Shark — Here’s How to Profit
Meme stocks jumped the shark. That phrase dates back to 1977 when Fonzie went water skiing on Happy Days and jumped a shark. Now, it signifies an event when everything changes.For meme stocks, that happened when AMC bought a gold mining company. AMC is a movie theater company that now owns 22% of Hycroft Mining. Hycroft has said, “We are not currently conducting commercial mining operations at the Hycroft Mine. There is no certainty that the mineral resources estimated at the Hycroft Mine will be mined or, if mined, processed profitably…” But AMC apparently sees “a company in an unrelated industry that appears to be just like AMC of a year ago. It, too, has rock-solid assets, but for a variety of reasons, it has been facing a severe and immediate liquidity issue… We are confident that our involvement can greatly help it to surmount its challenges — to its benefit, and to ours.” To sum up, AMC’s CEO invested in a gold mining company that isn’t operating and the miner says it might never mine again. This is a “jump the shark” moment for AMC. The trade to play it is put options. They’re expensive because a lot of traders are seeing a CEO distracted by stardom and seemingly losing focus on the core business. But don’t worry about him. He sold $40 million worth of AMC in the past few months. Since we want the trade open to the end of the year, January 2023 options could be used. The problem with that is stocks can only fall to zero so the upside potential of a put trade is capped when you open it. Long-dated puts on AMC will only deliver a large gain once. Use monthly near-the money options. With AMC near $21 as I type, I recommend the April 14 $21 put for about $3.40. At expiration, close the trade and buy May’s. Keep holding one-month puts while the company either becomes the next successful conglomerate like Berkshire Hathaway or moves into single digits.
Amber: I’m Sticking With the OG, GME
If I have to trade a meme stock, I’d pick the OG, GameStop. (I’ll save you the web search and tell you that OG is the original and the best of something, like Adam West as Batman.) As we saw this week, the stock is volatile. GME jumped as much as 50% as news broke that the Chairman bought 100,000 shares.0.4% of his net worth. My point isn’t that the investment is meaningless. It’s that the stock overreacts to everything. That makes it great for trading. But this isn’t a buy-and-hold stock. If you bought before meme stocks were a thing, you’d be up over 1,000%. But the average trader didn’t, and now many of them are holding on to losing positions. The average trade made anytime between January 2020 and November 2021 shows a loss. I recommend trading with my volatility indicator, a tool that is especially well-suited to stocks like this. I explained that indicator and the strategy for trading it in a paper you can find here. Following the rules described there, GME has delivered a gain of 204%. That gain came with 83% less risk compared to a buy-and-hold strategy. I’m working on a new strategy based on this indicator. It’s a work in progress but using the rules for that strategy, the gain in GME is 563% with a 74% win rate. Right now, my indicator is on a buy signal.He probably spent about $10 million on that trade, about
It’s late to rush into the trade. For this challenge, I will take the next signal using the rules I published in 2015 and trade that strategy through the end of the year using calls with exercise prices near the current market price.
Chris: The People’s Cryptocurrency Could Triple by May
Full disclosure: I own a few hundred shares of Virgin Galactic. And I own over a hundred thousand DOGE.since I published this video last week. I gave my reasons for why the people’s cryptocurrency will hit $0.23 next month. In a sustained bull run, it could go as high as $1.00. It’s at about $0.13 now. The technical reason is pretty straightforward. DOGE broke out of a wedge this week, and with the Nasdaq and general overall crypto market beginning to trend higher, this should carry DOGE as well. In my view, you can’t really look at the stock market’s technology sector and cryptocurrency separately anymore. The Nasdaq and bitcoin peaked alongside each other in mid-November. As the Nasdaq fell 20%, bitcoin fell 50% because it’s more volatile. DOGE was beginning to trend higher as well, but it needed more time to deleverage after running up 10,000% in a matter of months. It looks to have fully shaken off the weaker hands, but I can tell from chat rooms on YouTube, Twitter, and Reddit that the die-hards are still holding strong (excuse me, HODLING). At another glance, I’m updating my forecast to $0.31 by May 1. Using intraday prices shows a much higher level of resistance. So that’s almost a triple. Doubt the other meme stocks will do that well.Out of the two, Dogecoin’s looking like a pretty good trade
Now, it’s your turn…which of these trades would you follow?Proverbial gun to your head,
We’ll be back to you next Sunday with more healthy debate! And, of course, keep an eye on your inbox tomorrow morning for some fresh Big Money moves…
Mike Merson Managing Editor, True Options Masters