HomeBusinessWhy one expert is leery of the meme stock's latest resurgence

Why one expert is leery of the meme stock’s latest resurgence

Anthony Ramos plays a fictional character in ‘Dumb Money’.Sony photos

  • There’s something wrong with the recent explosion of meme stocks like GameStop, writes one market professional.

  • Deep out-of-the-money call options saw an explosion in trading volume just before the return of ‘Roaring Kitty’.

  • “It’s probably all legal, but someone played this beautifully,” said Interactive Brokers strategist Steve Sosnick.

The recent explosion of meme stocks like GameStop and AMC Entertainment looks suspicious, according to one market expert.

Interactive Brokers market strategist Steve Sosnick highlighted in a recent note that GameStop saw a surge in trading volume of deeply out-of-the-money call options ahead of the return of “Roaring Kitty” on social media.

“These options are normally active, but there have been notable increases in volumes and open interest for upside call options expiring in recent sessions this Friday,” Sosnick said Monday, the same day the meme stock explosion began. “Something started brewing late last month.”

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

GameStop stock closed at $17.46 on Friday, meaning the stock would have to rise 15%-72% next Friday for any money-making opportunities to arise, otherwise they would expire worthless.

GameStop shares have since risen as much as 271%, reaching a high of nearly $65 on Tuesday. The stock is trading around $35.72 on Wednesday afternoon. That still makes those call options money, creating huge profits for anyone who bought them last week.

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

Excluding the call options, GameStop shares have increased in value since late April, rising about 60% between April 24 and March 10, despite no fundamental news about the company.

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“But that upward trend doesn’t fully explain why we saw such an explosion of open interest in options,” Sosnick said.

“A suspicious person might wonder why ‘Roaring Kitty’ has chosen to return to social media today. Given my past experience analyzing the periodic bouts of meme stock activity, consider me as suspicious,” Sosnick said.

Sosnick compared the current surge in GameStop stock to the trading activity in Bed Bath & Beyond stock in August 2022, when current GameStop CEO Ryan Cohen bought shares in the now-bankrupt retailer. The disclosure of Cohen’s purchases sent Bed Bath & Beyond stock soaring, but the stock crashed shortly after it was revealed that Cohen had sold his shares before the rally. Bed Bath & Beyond is now bankrupt.

“I’m sorry, but I can’t shake the feeling that something similar is going on today, except that a social media darling is under no obligation to report insider activity to the SEC — he’s not insider. In both cases there is nothing wrong.” There was specific discussion about the shares. The SEC filings in BBBY were boilerplate, and the social media post contained literally no words. So it’s probably all legal, but someone played this beautifully,” Sosnick said.

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Shares of GameStop and AMC Entertainment were both well below their Tuesday highs, down 45% and 56%, respectively, during Wednesday’s trading session.

Read the original article on Business Insider

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