GameStop > GameStopped?
Last week, I decided to short the meme rally as the run up has been overwhelming so much so that I doubted it had the legs to go on. I made the decision to sell close to expiry puts since the volatility was high, and the time decay would run quickly. By Friday, the decision had proven effective as the the options expired worthless as $GameStop(GME)$ dove from its highs.
Now hovering at the low 20s, the relative value of the GME is still too high and will likely trend downwards eventually to the sub-10s/low 10s. This is the most likely outcome as the company has poor fundamentals. This has been further exacerbated by GameStop diluting the stock by releasing more 45million shares on Friday.
Some may be tempted to go short for the remaining distance so as to fully realise the anticipated drop. Over a long enough period of time, yielding a 100% gain by shorting the stock is feasible, but at which juncture will the net yield over time diminish to a point that it will prove no longer worthwhile and the opportunity cost of waiting outweighs the benefits. That is the question!
Coupled with the potential risk of a sudden resurgence as the meme army strikes again, this seemingly safe play can pose some challenges. The nature of these rallies are that there could be waves of attack on the stock, and it could be triggered as it was last week by a mere tweet, spurring the masses to go on a buying rampage pushing stocks up drastically again. Directly shorting the stocks could end up leading to margin calls if one doesn't balance out their portfolios right. Deriving an effective stop-loss strategy could also be challenging due to the this sudden stock resurgence risk, which could cause one to exit at a loss and missing the timing to re-enter at a similar/better position.
There are multiple options to explore, whether through options or direct shorting of the stock. Whatever you choose, be careful as there are still potential traps.
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