Note: In an April article, I reported on a new meme trade opportunity. I indicated that I would update readers when this trade was closed. This is that update.

Meme Stocks

A meme stock is a stock that has seen an increase in volume not because of the company’s performance, but rather because of hype on social media and online forums.

These stocks can be especially risky, because the underlying shares become disconnected from the company’s fundamentals. Therefore, it takes a special strategy to capture decent returns from the massive movements of these stocks, while managing the downside risks.

GameStop Revisited

GameStop (NYSE: GME) is widely regarded as the first meme stock. The price rose as much as 100 times over several months as its meme community crafted a short squeeze. These stocks carry an added risk of higher-than-normal volatility. But I described in this 2021 article a way to cash in on GME’s incredible volatility while keeping the risks manageable.

I closed the GME trade months early with most of the profit potential banked. My philosophy is generally to close these trades a month early if I have realized 90% of the profit potential. I will also usually close them if I have realized 80% of the profit potential with at least two months left in the contract.

The reason for closing early is that these are still incredibly volatile stocks. A major decline in price is still possible, as is a market crash. So, I think it’s prudent to take profits at the earliest possible time.

A New Opportunity

Trump Media & Technology Group (NSDQ: DJT), the parent company of Donald Trump’s social media platform Truth Social, was listed on the Nasdaq stock exchange in late March. Shares were extremely volatile once trading commenced. Thus, the latest meme stock — and opportunity — was born.

For a review of this specific trade — including a primer on how to use put options in a low-risk way to execute these trades — see DJT: Another GameStop Opportunity?

To summarize, on 3/26/24 I sold a far out-of-the-money put on DJT shares that would expire 87 days from the time I did the trade. The key to these meme trades is finding a high option premium for shares that are far out-of-the-money. For a put, that means the put’s strike price is far below the price of the underlying stock when the trade is executed.

With this trade, DJT shares would have to decline by 82.5% in 87 days for me to lose money. Although I believe DJT shares are grossly overvalued, I felt like this was a pretty safe bet.

Shares were at $62.35, and the June 21 put with a strike price of $12.50 was trading at $1.60 per share. I sold 10 contracts, which meant the amount of money I risked in case of assignment was $12.50 per share minus the $1.60 per share option premium x 100 shares (an option represents 100 shares) x 10 contracts. The total money risked was $10,900. If shares remained above $12.50, I would not risk assignment. As long as shares didn’t fall below $10.90 a share, I would not lose money.

When the initial trade executed, I set a limit order to close the trade if the option value declined to $0.11 a share. The plan was to buy back the contract for $0.11 a share that I had sold for $1.60 a share. That would give me 93.1% of the profit potential of the overall trade. (This was kind of an arbitrary number).

I did endure some volatility. DJT shares fell to as low as $22.84 a share in April, and my trade was briefly unprofitable on paper. But then shares started to recover, which made the put premiums fall. Finally, on 5/17/24, the option value fell to $0.11, and my limit order executed.

When I set up the trade, if it went to expiration and was not assigned it had a potential annualized return of 61.5%. By closing it early, I earned ($1.60 – $0.11)/$10.90 = 13.7% in 52 days. That’s 96.0% annualized, so I fared much better by closing the trade more than a month early.

Final Thoughts

Note that I no longer recommend selling a DJT put. There were specific reasons I chose a short duration contract. Insiders will soon be able to dump DJT shares, and that creates additional risk that shares could decline. These meme opportunities can arise and disappear quickly. In my opinion the risk/reward is no longer compelling for this trade.

To conclude, I am not trying to brag about this trade. I wanted to give readers a walkthrough of an actual trade in real time, highlighting the opportunity, the mechanics of the trade, how I managed the risk, and the factors that led me to execute and ultimately close this trade.

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