By Andrey Dashkov, analyst, Casey Research
There’s an alarming trend in the markets…
And it has nothing to do with high inflation or the possible economic recession.
It’s something else.
The “meme” stock phenomenon, where shares of several companies got a massive boost from online communities… has found another target.
Options.
I’ll admit that I respect the guts of the people placing bets against some of the most powerful financial institutions.
But as an investment strategy, it’s not sufficient.
Back in February 2021, I said:
With a moral case against “the man” and potentially billions more dollars in cash, this ragtag team could shake the whole financial system of the United States.
A note of caution, though. It’s true that some made fortunes in this GameStop run-up. But I recommend you stay away from any of these overhyped positions… It’s just too risky.
In a moment, I’ll tell you about a better way to deploy your speculative capital.
Yes, it involves options.
But in a way that is smarter and more comprehensive… with built-in risk management and diversification.
The Power of Options
Options give investors a way to bet on trends without putting too much capital at risk.
You can trade options with as little as $100. If the trade goes your way, you could realize double- or even triple-digit returns in a matter of months, if not weeks.
This is why options are appealing to individual investors.
They don’t require too much capital upfront, and the gains can be massive.
However, you need to manage your risk. That means understanding maximum gains and losses on every trade you make (some trades can incur losses of more than 100%) to position sizing, using limit orders, getting up-to-date guidance, and following a comprehensive trading system…
This is what the investment community often gets wrong. If you misread a trend, you can lose most – if not all – of your capital.
And retail investors have been buying options in huge numbers, Bloomberg reports.
The way their “strategy” works: they pick a low-quality stock that’s temporarily rising, buy it, and try to amplify the returns with call options on the same stock.
In fact, these trends remind us of the “meme stock” strategies where investors cooperated to drive up prices of unloved companies like GameStop or AMC.
Traders were quoted as saying that they are seeing “outsized moves in low-quality companies.”
This is not a good strategy, of course.
Stocks are volatile, but derivatives can be even more so.
This is why you need to harness the power of options with experts on your side.
Instead of Joining the “Meme” Crowd, Do This
Here at Casey Research, we do not run an options-based service… but our sister publication, Nomi Prins’ Distortion Money Matrix, has a proprietary method to guide you through your option trades.
Nomi Prins and her team use trends like inflation… supply-chain disruptions… earnings reports… and others to help investors locate the best options trades.
It’s based on Distortion Signals. Here’s Nomi:
I get a Distortion Signal when a lot of money is coming in or out of a stock… while at the same time triggering a change of momentum.
I also use my experiences on Wall Street and in Washington to track big policy changes that could impact the markets.
In other words, Nomi leverages her experience in both the financial markets and in Washington to provide her readers with a strategy that maximizes returns and contains risks.
For instance, the service’s latest options trade is up 2% in one day.
This is a much better approach than chasing the latest “meme” trade.
So don’t forget to check out the Distortion Money Matrix right here.
Good investing,
Andrey Dashkov
Analyst, Casey Research