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Unless you've been camping on Mt. Everest this week, you've heard the deal with GameStop Corp. (NYSE: GME).
The company had been on deathwatch since 2019, and didn't do as well as other pandemic-era "comebacks"... until the Internet got hold of it. The price action has been just absolutely bananas over the past week or so as momentum has gathered. In the five minutes since I started to type this, the price has yo-yoed in a $50 range.
GameStop has been a short squeeze of massive proportions, but as of Wednesday, the two biggest short positions, run by Melvin Capital and Citron Research, have been covered and closed. Finito. Andrew Left, the CEO of Citron - which really likes to short stocks - said his traders had covered their short at $90 and taken a 100% loss.
Without the big shorts, there's just no mechanical reason for this rally to continue. It's like a car with the gas light on - you might make it a couple more miles, but one way or another, you're stopping. It could be a matter of hours before those Internet-based investors realize they've bought big into a company that, for all the hype of the past few days, is still a really troubled operation on deathwatch.
Here's the thing, though... GameStop is only the biggest, most famous of these stories right now. Reddit, TikTok, and other social media-based investors have targeted other big Wall Street shorts out there.
I've made a list I'll share with you in a second, and I'll tell you how to play them.
Like I said the other day, cooler, calmer heads have a chance to sneak in the back door, safely pocket some gains, and get out again before anyone realizes what's happened...
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I'm betting we haven't heard the last from organized, individual mobile-app investors - not by a long shot.
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In fact, GameStop's far from their only "pet project" right now. The Money Calendar has shown me a list of stocks that are fundamentally pretty bad, but where there are excellent chances of a short squeeze happening. The sheer force of people going long on the stock could very well force the shorts out there to cover and drive the stocks up even faster.
Have a look at this screenshot - and remember, I'm not suggesting for a second that anyone buy any of these, or short them for that matter:
Here is a list of the highest short interest ratios and targets for the retail trader community.
Take a look at GME, the granddaddy of them all, over the past few months:
On the original gap up, volume was over 144 million shares - the average volume is 6 million. On Jan. 12, 2021, GME was trading at $20. Five days later, the stock hit a high of $380, a 1,900% rise.
Like I said, Redditors aren't only targeting GME. Another stock that's facing this same volatility is Blackberry Ltd. (NYSE: BB).
As you can see in the chart, BB has faced a major spike that started around Jan. 14. This company hit a 52-week low of $2.70 and is currently trading at $25.10 at the time of writing.
And then there's AMC Entertainment Holdings Inc. (NYSE: AMC).
In the chart above, you can see how AMC has traded mostly flat up until Jan. 27. AMC hit a 52-week low of $1.91 and just hit a high of $20.36.
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Now, these three stocks are probably already blown; some trading platforms have controversially restricted the actions shareholders can take on these. But there are other candidates on the list; all of them should be approached with the same ground rules.
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Volatility is extreme - or it could be, depending on the stock. Some of these have moved in insane trading ranges; GME moved $131 in a single session the other day.
So directional risk is extreme, which means that traditional trading systems don't work in this environment. Buying or shorting the stock is way too risky.
That's why this is a great opportunity to buy options. Options contracts will keep your dollar risk low and have a reasonable chance of making some money.
Here are the top two ways to play these controversial companies.
You could sell a way out-of-the-money (OTM) short put spread. If you go out in time a month from now, with puts expiring in late February, you simply select the strike that's closest to the "pre-mania" price of the stock. You'd sell a put at that strike and buy a put for $5 less - easy as that.
For example, when GME was trading at $325, you could have sold a GME Feb. 26, 2021 $20 put and bought a GME Feb. 26, 2021 $15 put for a hundred bucks for 100 contracts... at a risk of $40.
GME was trading at $20 prior to this madness. Once this "party" is over, the stock will likely retrace and stay at or above $20 for the next 30 days. This trade would have expired worthless, leaving you with a 20% profit.
Another strategy is to sell an at-the-money (ATM) short put or call spread. To be clear, you have about a 50/50 chance of making money on this strategy. Basically, this is about selling a spread and hoping for the best, a bit like "betting on the black" in roulette. Keep your risk to reward around 1 to 1, meaning risk $1 to make $1.
As I write this, you could sell a BB Jan. 29, 2021 $23 put and buy the BB Jan. 29, 2021 $22 put for $0.65 and risk $0.35. If BB is at or above $23 on Friday, the options expire worthless, and you pocket a 185% ROI.
Now, as I said, you may have trouble trading GameStop, but there are lots of other stocks on that list, and either of these strategies stand a good chance of putting money in your pocket for a fraction of the risk the big crowds are taking on right now. Proceed with caution - be sure of your risk tolerance and what you can afford to lose - and have fun writing yourself into the legend in market history books.
A small group of readers got a chance to do that, too, not long ago. These folks joined us for a secret project and got the chance to jump-start their trading even further - and score returns up to 546%. Well, today is your chance to get on board for the project's "Phase II." I believe so strongly in this that I'm guaranteeing at least 30 "100% trade" recommendations over the next 12 months. Let me show you what this is about...
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About the Author
Tom Gentile, options trading specialist for Money Map Press, is widely known as America's No. 1 Pattern Trader thanks to his nearly 30 years of experience spotting lucrative patterns in options trading. Tom has taught over 300,000 traders his option trading secrets in a variety of settings, including seminars and workshops. He's also a bestselling author of eight books and training courses.