The Best Way to Profit From the GameStop Mega Rally
By: Dividend Sensei
In part one of this series, I explained what’s behind the amazing and, to put it bluntly, insane rallies in AMC and Gamestop.
For companies such as GameStop and AMC, where traders on both sides are battling with extreme leverage (as high as 3,200X) fundamentals don’t matter one bit.
Recently GameStop was still 120% shorted, compared to 140% back in early January. Theoretically, if the stars aligned just right, this is a stock that could go up even faster than it did in January.
- in January just a handful of shorts buckled and closed out their positions
- if they were to all do it in February, Gamestop could potentially soar even faster and to levels that would be truly mind-blowing (over $200 billion market cap or even over $1 trillion if the gamma squeeze were big enough)
These aren’t high probability scenarios, and I sure as heck am NOT recommending anyone run out and start gambling with Gamestop, or any companies’ options.
- most options expire worthless and represent 100% losses
- you have to be right about direction, magnitude, and timing
- being wrong about any of these can result in 100% losses
AMC is in a similar boat as GME.
- S&P estimates a 65% chance that AMC will go bankrupt and its stock to zero
- S&P estimates Gamestop’s probability of bankruptcy at 45%
When the probability of a total loss on any given company is this high, I recommend avoiding it unless it’s part of a tiny portion of your speculative portfolio.
- the part of your portfolio where you are making the riskiest bets, not investments, outright gambling
- and are OK with 100% losses
- which are likely with naked options
- but especially so with GME and AMC
- whose business fundamentals are extremely weak according to analysts, rating agencies, and bond investors
So how can you maximize your profits when dealing with rampant speculation where the most likely outcome is a large or even complete loss?
The Only Way To Walk Away A Winner When This Craziness Finally Ends
I'm an Army veteran and former energy dividend writer for The Motley Fool. I'm a proud co-founder of Wide Moat Research, Dividend Kings, and the Intelligent Dividend Investor. My work can be found on Seeking Alpha, Dividend Kings, iREIT, and the Intelligent Dividend Investor. My goal is to help all people learn how to harness the awesome power of dividend growth investing to achieve their financial dreams and enrich their lives. With 24 years of investing experience, I've learned what works and more importantly, what doesn't, when it comes to building long-term wealth and income streams and achieving long-term financial goals.
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