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Brian's Big Idea on Meme Stocks

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Meme stocks are all the rage once again and if we learned any lessons from the last time these stocks “mooned.” This time it’s a little different, the APES have a better understanding of the tools used by the biggest of players and Roaring Kitty has a significantly larger position.

That all said, the basic idea behind why these stocks are selected by the APES is the fact that they all have a high amount of short interest. Anything more than 20% short interest is considered a high short interest position, but when you get to 25% and 30% it becomes a crowded trade and the potential for a short squeeze looms.

We take a look at GameStop (GME - Free Report) and note that the recent quarter was a disappointment and the quarterly pattern for revenues shows the seasonality where the following quarter is generally lower still. The pattern also shows the fourth quarter is very strong… but all of this interest in the stock could end up driving more traffic to their stores and increase sales.

AMC (AMC - Free Report) is a Zacks Rank #2 (Buy) as the earnings estimates for this year and for next year have improved over the last 60 days. While foot traffic at movie theaters might be a little lower this year, the revenue projections are showing a good sized increase for next year.

We also take a look at Sunpower (SPWR - Free Report) a solar company that has a stunning 88% short interest position. If there was ever an example of a crowded trade, SPWR is it. The fundamentals behind the company are not that good, so you can see why the shorts are all over the stock… but at the same time with a market capitalization of roughly $600M the shorts are playing a dangerous game.

What is clear is that these stocks can be very volatile and very dangerous to your portfolio much less your stress level. What I do know is that retail investors can limit their losses by using options.

In the spirit of full disclosure, my personal options trading experience is nothing to brag about. Sure I turned $5K into $130K over the course of three weeks almost a decade ago on Amazon (AMZN - Free Report) options and also turned $25K into $125K over 3 day period on Tesla (TSLA - Free Report) – but the vast majority of my trades in the options space have been losers. That is why I don’t run an options service.

Kevin Matras does run our Options Trader service here at Zacks and he helps you navigate the world of options with a daily write that speaks to the broader market and he also addresses the pertinent news of the holdings in the portfolio. If I had any knowledge of the subject I would tell you that he uses covered calls or put spreads or any other term, but since I have been burned so much I leave that wisdom in that space to him.

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