The Rise and Fall Challenges of Meme Stocks

The recent surge in meme stocks such as GameStop and AMC Entertainment has raised suspicions among market experts.

Interactive Brokers' market strategist Steve Sosnick pointed out in a recent note that GameStop experienced a significant increase in deep out-of-the-money call option trading volume just before the return of "Roaring Kitty" on social media.

"These options are typically active, but we noticed a notable increase in volumes and open interest of upside call options expiring this Friday over the recent sessions," Sosnick stated on Monday, coinciding with the beginning of the meme-stock explosion. "Something started brewing late last month."

Sosnick highlighted that call options with $20, $25, and $30 strike prices expiring this Friday saw a massive surge in trading volumes last week, with tens of thousands of options being purchased on May 10.

GameStop's stock closed at $17.46 on Friday, meaning the stock would need to increase by 15%-72% by this Friday for the options to be profitable; otherwise, they would expire worthless.

Since then, GameStop shares have soared by as much as 271%, reaching a high of nearly $65 on Tuesday. The stock was trading at approximately $35.72 as of Wednesday afternoon, still making those call options highly profitable for anyone who purchased them last week.

The May 17 $30 call option on GameStop, which closed at $0.43 on May 9, peaked at $31 on Monday, representing a staggering two-day gain of more than 7,000%, according to Yahoo Finance data.

In addition to the call options, GameStop stock has been rising since late April, jumping about 60% from April 24 through May 10 despite no significant news from the company.

"But this uptrend alone doesn't fully explain the explosion in open interest in options," Sosnick commented.

"A suspicious person might wonder why 'Roaring Kitty' decided to return to social media today. Given my past experience in analyzing meme stock activity, I am suspicious," Sosnick remarked.

Sosnick compared the current surge in GameStop stock to the trading activity in Bed Bath & Beyond stock in August 2022. At that time, GameStop CEO Ryan Cohen purchased shares in the now-bankrupt retailer, leading to a significant surge in Bed Bath & Beyond stock, which later crashed after Cohen sold his shares during the rally. Bed Bath & Beyond has since declared bankruptcy.

"I can't shake the feeling that something similar is happening today, except that a social media influencer isn't obligated to file insider activity with the SEC – he's not considered an insider. In both cases, nothing specific was mentioned about the stocks. The SEC filings for Bed Bath & Beyond were standard, and the social media post had no words. So, it's likely all legal, but someone executed this strategy brilliantly," Sosnick noted.

Shares of GameStop and AMC Entertainment have since fallen significantly from their Tuesday peaks, down 45% and 56%, respectively, in Wednesday's trading session.

Wealth advisors and RIAs, it's crucial to recognize the potential risks and volatility associated with meme stocks. The recent activity surrounding GameStop and AMC highlights the importance of understanding market dynamics and the influence of social media on stock prices. While some investors may see significant gains, others may face substantial losses when these stocks inevitably correct.

As trusted advisors, it's essential to guide clients through these volatile times by emphasizing the importance of a diversified portfolio and long-term investment strategies. Encourage clients to remain cautious and to conduct thorough research before making investment decisions influenced by social media trends.

The rapid rise and fall of meme stocks serve as a reminder of the speculative nature of certain market segments. While these stocks can provide short-term gains, they also carry a high level of risk. As fiduciaries, it's our responsibility to ensure that clients are well-informed and prepared for the potential consequences of investing in highly volatile stocks.

The recent events also underscore the significance of regulatory oversight and transparency in the markets. While the activities of social media influencers like "Roaring Kitty" may be legal, they raise questions about market manipulation and the need for greater scrutiny.

In conclusion, the explosion of meme stocks like GameStop and AMC Entertainment presents both opportunities and challenges for investors. By maintaining a disciplined approach to investing and prioritizing the long-term financial goals of our clients, we can navigate these turbulent times and help our clients achieve lasting financial success.


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