Unless you are living under a rock, you have likely heard about what has happened this week with companies like GameStop, AMC and Build-a-Bear. Even my mother, who is a nurse (bless her soul) with absolutely no interest in trading called me yesterday to ask if I would invest in GameStop. I’m sure you have heard.
Let’s deal specifically with GameStop. You are likely confused about all of this – as are many Wall Street traders – because it seems nonsensical. Few companies ever see their valuations soar 1,000% in a matter of days. Those companies that have had such success have likely made an innovative move that rocked investors’ views and changed the environment of their business. But GameStop? It had been struggling before the pandemic and was especially hard hit as many of its locations were temporarily shut over the last year. How in the world could it surge so much?
My newsfeed is full of articles explaining how this happened. I’m sure you now know this well, so I’ll just give a brief summary: Wall Street insiders (think hedge fund manager types) placed bets against GameStop and others struggling companies, in an effort to profit from their poor fourth quarter performance. In other words, they ‘shorted’ the stock, so as the stock drops, the insiders make money. The folks on Reddit got wind of this and took a stand, goading each other to buy more stock and send the price higher. With many people jumping on board, the stock price rose and squeezed Wall Street to cover their short positions, accelerating the price increase, which further encouraged more buying from the Reddit folks. Game stop opened 2021 at $19.03, hit a high yesterday of $513.12 and is currently trading somewhere near $300. What a ride!
I’ve heard terms lately like ‘democratizing the stock market’ – average traders are unseating the Wall Street elite. And while that appears to have been effective over the last week, it will prove brutally unsustainable as those who are willing to keep their money invested in the stock begin to realize that they can earn a better return elsewhere. Yes, the great equalizer here is money. A dollar is a dollar. And while I seem to be bucking the trend, there will probably be thousands of novice investors singing the blues and regretfully watching their trading accounts suffer in the coming days.
Regardless of which camp you are rooting for, the fact is that GME went to the moon this week and has been swinging wildly ever since. The question then is “How do we trade it?” For me, the short answer is “I don’t trade it.” Sure, there is opportunity with all of that movement, but it’s largely irrational. I don’t like to put my money into things I don’t understand and can’t predict. To give you an example, as GameStop approached $500 around 10 am (ET) on Thursday, who could have known it would be trading for $125 an hour and a half later? Just think of the wealth that was destroyed in those moments.
No, I won’t be trading GameStop. Actually, I rarely trade anything other than SPY options. I trade SPY options because I know SPY. It is liquid and often predictable. I spoke with someone yesterday who laughed at how boring my trades seem – but maybe that’s the point. I don’t trade to make a statement, and I don’t trade to bet it all on an exciting prospect. I trade to because I want to make money consistently. I will be trading SPY options when the opening bell rings on Monday morning – what will you be trading?
This is a bubble… want to know what those are? Google ‘Dutch tulip bubble’…. At the height of this mania in the 1600’s, traders were paying six times the average person’s annual salary for… yes, a tulip bulb