Avoid Bite-Back from Meme-Stock-Mania with This New Move
In this week’s installment of meme-stock-mania, I want to draw your attention to Support.com Inc. (Nasdaq: SPRT). Shares of the cloud-based customer support company jumped more than 182.58% in Friday’s pre-market session. By the time the market opened, sentiment cooled (a little), and the stock ended up opening Friday’s session up 96.14% on the day. For the week, shares of SPRT gained nearly 420%.
What drove those gains? Nothing more than internet chatter and an orchestrated short-squeeze.
Friday’s move was great if you were one of the traders who got into the stock prior to last week’s trading. But if you missed that move, you probably want to steer clear of the stock, completely, because there’s no easy way to trade the stock without leaving yourself open to outsized risk.
Let me explain.
If you buy the stock outright in the hopes of a move higher, you could get taken to the cleaners as traders who were already in the stock prior to Friday’s move, capture profits, and leave you holding the bag.
That’s too much risk with no statistical advantage working in your favor.
If you think the stock is going to pull back, and you “short” the stock, outright, you’re going to be at risk of getting pinched by a follow-up short-squeeze.
That’s also too much risk with no statistical advantage working in your favor.
But what about buying options?
If you decide to buy a call or put option, depending on which directions you think the stock could go next, you’re likely to get stung by collapsing implied volatility.
As I write this, the implied volatility for the SPRT October 15, 2021 $39 Calls and SPRT October 15, 2021 $39 Puts is 300.3% and 499.82%, respectively. Those values are really, really, high!
Even if you pick the correct direction: a call option if you think the stock is going higher, or a put option if you think the stock is going lower, the implied volatility will likely decrease, and with it the value of the option.
Once again, that’s too much risk and, in this case, there’s a statistical disadvantage working against you.
I know the idea of capturing quick profits on meme-stocks is exciting, but if you come to the trade “after” the initial big move, you stand a really good chance of getting burned. But, if you are inclined to chase these kinds of trades, please be careful and only allocate capital you can afford to lose.
On the other hand, there are so many ways where you can make money by looking for trade set-ups or trade confirmations that don’t require taking on too much risk for not enough potential profit.
With that said, let’s move on to what I’m actually watching and the accompanying trades.
Shares of the financial management software company, Workday Inc. (Nasdaq: WDAY), were up sharply during Friday’s session after the company reported second-quarter earnings and subscription revenue guidance ahead of analysts’ estimates.
For the quarter, the company reported revenue and earnings of $1.26 billion and $1.24 per share. Both numbers were ahead of analyst expectations of earnings of $0.77 a share on revenue of $1.24 billion. Looking ahead, the company said it expects Q3 revenue between $1.156 billion and $1.158 billion compared to estimates of $1.13 billion.
Traders love it when a company beats analyst expectations, especially when the company beats three estimates, as is the case with WDAY. That means WDAY has a legitimate potential tailwind that can take the stock higher.
I like buying the WDAY October 15, 2021 $$280/$290 Call Spread for $3.00 or less.
At that price, this trade has a 3.33-to-1 reward to risk profile.
Next up, I’m watching The Goldman Sachs Group Inc. (NYSE: GS). Last week’s trading saw shares of GS push to an all-time intraday high. And last week’s move to the upside came on the heels of a brief pullback in the previous week’s trading.
That’s a great setup. A quick pull back for some profit-taking followed by a wave of bargain-hunting buying. That tells me investors still have a lot of conviction in GS, and with good reason.
With week’s dovish comments from the Fed, coupled with the stock trading through resistance, it looks like a great setup for the stock to start another leg higher!
I like buying the GS October 15, 2021 $420/$425 Call Spread for $2.50 or less.
At that price, this trade has a 2-for-1 reward to risk profile.
So that’s this week’s watchlist. You can expect more from me tomorrow morning, so stay tuned.