Have you heard the latest joke on Wall Street? "Would investors buy Robinhood shares after a disastrous IPO? Yes, they Sherwood."
Robinhood Markets
(NASDAQ:HOOD) surged 50% yesterday, adding to a big rally the previous day. Shares are
down 5% in premarket trading. The stock is now up more than 85% from where it opened on its first day of trading and
more than 100% higher from where it closed that day when the IPO broke.
In a storyline worthy of Mary Shelley, the creator has become the target of its creation, although its doubtful insiders are complaining. HOOD is the most-mentioned stock on WallStreetBets, according to Quiver Quantitative. The rally is reminiscent of moves in GameStop
(NYSE:GME) and AMC
(NYSE:AMC), both of which are on losing streaks since HOOD came to market, leading to some speculation that retail investors are rotating cash from those names. But options experts say the trade in Robinhood stock is different from other meme rallies.
Puts outweighing calls: Like previous retail-driven rallies, the surge in HOOD has been supported by deep-out-of-the-money call buying. The biggest volume of any option was for $70 calls. But that doesn't necessarily mean a gamma squeeze is in effect, like the original GameStop move. Gamma squeezes occur as the writers, or sellers, of call options buy the underlying stock as a hedge, increasing demand for shares and pushing the price higher. While the $70 call was the most popular single option, bearish puts overall had more volume, Christopher Murphy, co-head of derivatives strategy as Susquehanna, said. The biggest plays were August 20 $30 and $20 puts, Murphy said. "All of it appears to be small lots, but that doesn't necessarily mean it's all retail," he wrote, according to
Barron's. "Because the options are so thin and the volatility is so high, it makes sense all the trading (whether institutional or retail) would be in small lots." Another sign the rally may stall is that the 10-day moving average of call volume is on a downward trend, according to Bloomberg. And the 10-day average of shares traded on all exchanges is at its lowest level since November.
What next for the stock? Two big names have stepped to the sidelines after yesterday's big run-up in HOOD. Cathie Wood's ARK Investment Management was an early fan of Robinhood and bought on the dip as it went public and
steadily increased holdings to more than 3M shares for three funds, including the flagship ARK Innovation ETF
(NYSEARCA:ARKK). But ARK didn't accumulate any shares during yesterday's trading, according to its daily trading statement. Jim Cramer said the stock could be "bought here" on his "
Mad Money" show Monday night. But he's advising locking in some gains.
"Meme stocks are easy money on the way up. But as we've seen with GameStop and AMC of late, you have to take profits while you still have them by selling gradually on the way up," Cramer said last night. "It doesn't matter how much you love (Robinhood), discipline always trumps conviction, and discipline says you need to take something off the table when you've got an 80% gain in two days." What could separate Robinhood from GameStop, AMC and other WallStreetBets favorites is that it can be a proxy for retail trading for the broader market.
If funds believe that retail enthusiasm is here to stay, they will likely be bullish on HOOD and the potential for higher trading volumes. (
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