The highly speculative nature of the "wallstreetbets" Reddit phenomenon that is taking the markets by storm of late has many young, inexperienced investors itching to get in on the action. Other more seasoned veteran investors are looking to take the other side of the deal. After all, what goes up must come down, right?
Both strategies are inherently risky. The volatility of these stocks makes either upside or downside bet extremely speculative. Looking at the options prices for most of these stocks, one will notice the prices are insane. Of course, options are priced based on volatility, so this all makes sense. Investors also need to keep in mind that the writer (seller) of the option looks to make money when it’s written, so they’re mostly losing bets (like taking insurance at the blackjack table).
However, yesterday was an interesting day for some of these stocks. In particular, AMC Entertainment (NYSE:AMC) at one point saw its options prices drop across the board, as the stock essentially looked like it was finding some sort of equilibrium. The stock traded essentially flat, despite opening around 30% higher in early trading.
This provided an interesting opportunity for speculators to engage in a strangle options strategy. I would encourage investors to read up more on this topic, but essentially this strategy involves buying both a call and a put of a given company at the same expiry date.
The bet is that the volatility of this stock will be greater than what’s being priced in by the options at a given point in time. In other words, the stock will fluctuate so greatly that whether it’s on the upside or downside, the investor wins.
This is an extremely speculative strategy that almost always loses (due to the pricing mechanism discussed previously). However, for those needing to get a piece of the action, this is how I would play the trade – on lower volatility days.
Invest wisely, my friends.
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