The Meme Stock Bonanza


Nov 15, 2021
Behailu Tekletsadik

Meme stocks have taken the financial world by storm over the last couple of years. From early internet hype stocks like Snapchat (SNAP) and Beyond Meat (BYND) to the monumental rise of Gamestop (GME) and AMC (AMC) during the short squeeze of early 2021, the power of the retail trader has never been stronger.

But what are meme stocks, and how should you approach them?

This article will detail how meme stocks came to be, how they behave in the options market, and how you can use data from the Lantern app to develop your own meme stock strategy.

Meme Stock Review

There is no set definition for a meme stock. Still, the generally accepted attributes of meme stocks include an immense surge in retail trading and hype in online internet interest on platforms such as Reddit and Discord.

Once a stock gains enough critical interest, an influx of retail traders pours capital into the shares, which often exponentially shoots the price of the share price to all-time highs and creates immediate wealth for the early investors if they can exit their position.

Another trademark of many meme stocks is their “supernova effect,” where the price will appreciate tremendously but drop just as fast once trading momentum slows.

However, the meme stock effect can bring new life to the companies that experience this extreme growth. For example, Gamestop recently closed on a new $500 million credit line as a result of renewed interest and leadership proactively pivoting towards eCommerce.

Meme Stock Options

Options, especially calls, play a powerful role with meme stocks because they provide tremendous liquidity in those markets in a short amount of time. If meme stocks can surpass the most popular strike prices, then resistance levels shatter and propel the share prices even higher.

Famous meme stock investors such as Keith Gill, aka “Roaring Kitty,” used OTM calls to capitalize on the upswing in Gamestop shares on his 4/16/21, catapulting his profits to over $46 million.

While many meme stock trades may not be as lucrative as Gill’s, his example shows how options can enhance a trading strategy, primarily once you identify companies that have the potential to go viral and become meme stocks.

Meme Stock Strategies

Below are two strategies options traders can employ when researching new meme stocks to trade:

Online Hype

Since famous meme stock trades need time to build mass and gain traction, traders should stay on top of news and discussions in the most active trading communities. Traditional investment fundamentals may not be indicative of the next popular meme stock, which means the next big trade may not be an obvious choice.

Reddit and Discord trading channels can be good places to learn the most popular stocks, but it’s important to practice discretion in these groups. Large communities like the famous r/wallstreetbets have a strong reputation and many moderators to mitigate pump and dump schemes. Still, smaller, niche communities may not have as rigorous guidelines to keep members’ best interests in mind.

Momentum Trading

If getting in on the ground floor and scouring the web for the next big trade is not your cup of tea, then you may want to consider momentum trading for meme stocks. Momentum trading with options is similar to momentum trading with stocks. The trader will “ride the wave” by entering the market when it is picking up steam and exit before it becomes too crowded and overvalued to sustain its growth.

Momentum traders who can time their entry and exit points well can realize substantial profits, but there may be more risk because the big players may dump their positions at any time. Clearly defining entry points and target profits will help you scale out of your position and avoid a blowout.

How to Leverage Lantern Data to Optimize Trades

The Lantern app has many features that can help you structure and analyze your next meme stock position, mainly so you can gauge market sentiment.

  • Check trading volume in real-time — Our options flow provides everything from current trading volume, Greeks quick reference, bid/ask spreads, and much more. You can even compare the actual price against the theoretical model to see if the contracts are behaving abnormally.
  • Monitor the put/call ratio to identify market sentiment — Maybe you heard about a potential meme stock on a subreddit and want to see what the market thinks. You can check the put/call ratio for a stock in real-time to see if the market is bullish or bearish.
  • Track potential meme stocks on the watchlist — If you want to track a basket of potential meme stocks, add them to your in-app watchlist. By utilizing your watchlist to organize trades you may be interested in, you can always have a quick reference in case any of them start taking off.

Don’t Get Left Holding the Bag

Meme stocks can be powerful speculative additions to your portfolio and trading strategy, but regardless of your confidence, you don’t want to be the last buyer before trading momentum halts. By utilizing the Lantern software and employing trading best practices, you can trade meme stocks without sacrificing your portfolio integrity.

Check out our app and API.

The Meme Stock Bonanza was originally published in Lantern on Medium, where people are continuing the conversation by highlighting and responding to this story.