Bed Bath & Beyond and GameStop Stocks Surge: How to Trade BBBY and GME
Bed Bath & Beyond and GameStop Stocks Surge: How to Trade BBBY and GME
Meme Stocks Take a Breather After Big Surge
A basket of popular meme stocks fell on Friday ahead of an extended U.S. holiday weekend despite the broader stock market making modest gains. The tech-heavy Nasdaq (/NQ) rose 0.64% to end the week, up an impressive 4.45% to close at 11,608.
Bulls controlled price action throughout the week. A slowdown in consumer prices in December sent Treasury yields lower as rate traders priced in a less aggressive Fed rate hike path. The 10-year yield hit 3.417%--the lowest level since early December. The S&P 500 VIX ‘fear gauge” fell to its lowest mark since January 2022.
Bed Bath & Beyond Rises in Massive Weekly Increase
Bed Bath & Beyond (BBBY) dropped 30.15% on Friday, trimming its weekly gain down to +178.63%. That was the biggest weekly gain on record, smashing the prior placeholder of 62.2% back in August, and following last week’s record weekly loss of 47.8%. Traders speculating on the company’s bankruptcy risk are responsible for the massive price swings as many hope to catch the directional moves.
The stock boasted an IV Rank (IVR) of over 100 on Friday, indicating that implied volatility (IV) has exceeded its prior high. Despite the mean-reverting nature of IV, short volatility strategies are ill-suited when considering price action’s current disposition. Until markets gain clarity on the company’s financial future as it negotiates with lenders, traders should take a cautious approach.
An out of the money vertical put spread may be attractive to those with a neutral to bullish assumption, which provides a defined risk trade. An increase in volatility would work against this type of trade, but with IV already near extreme levels, that risk is acceptable since our risk is defined.
GameStop Joins Meme Mania in Wild Week
GameStop (GME), another classic meme stock, dropped a milder 0.68% on Friday, although it still had a stellar weekly performance of 24.48%--the biggest gain since May. A short squeeze helped drive prices higher amid the bullish risk-on atmosphere. The stock’s short float interest hovered around 21% over the last year, which is relatively high. Short sellers are betting that the traditionally brick-and-mortar store can’t compete in the new digital age.
Taking a short trade on the stock with a long put offers a practical strategy for those believing the move higher is overextended. A price drop would likely increase IV, which would benefit the position. The expected move based on the current IV for the February expiration is $5.49. For example, buying an $18.75 put for February 17 costs $2.45, and a move to $15 at expiration leaves $3.75 worth of intrinsic value for a $1.30 profit.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.