How to Spot the End of a Short Squeeze

Last week, I told you about what was really pushing meme stocks like AMC Entertainment Holdings Inc. (NYSE:AMC), Blackberry Ltd. (NYSE:BB), and Express Inc. (NYSE:EXPR) higher…

It wasn’t Reddit. It wasn’t hedge funds. It wasn’t big banks.

It was something called a gamma squeeze.

Since then, I received a great question directly from a Profit Takeover reader…

First off – let’s talk about how you spot a squeeze before it happens.

We need to see four things increasing all at once in order for a squeeze – gamma or short – to take place:

  1. Stock volume
  2. Volatility
  3. Option volume
  4. Price

That’s exactly what happened last week when Reddit’s most popular stocks started climbing higher at lightning speed.

But today marks the start of a new week – and now, you need to know how to spot a squeeze’s end.

I don’t want you to lose any money on these fired-up names.

Just like spotting a squeeze’s start, we need to see four things to signal the end of a meme stock’s ride.

We need to see the stock’s price start to decline…

Volume drying up…

Option volume dropping…

And implied volatility beginning to dip.

When any of these things start happening, it should be a signal that it might be time to drop a meme name.

Let’s take a look at AMC.

Today, the stock is up over 16%. One would think that means that this movie theater name isn’t done climbing higher. But let’s dive deeper…

Because I think we saw “peak meme” on Wednesday.

Today, AMC has traded 175 million shares. That sounds like a lot, sure. But it’s all relative – and on Wednesday, AMC traded 766 million.

Option volume is also declining. On Wednesday, 4.6 million option contracts were traded. On Thursday, that number fell to 4 million. On Friday, it was at 2.6 million. By noon today, we had only seen 515,000. And I wouldn’t be surprised if we don’t even break the 2 million mark.

AMC spent last week breaking records, hitting headlines, and making a lot of traders – institutional and retail alike – a lot of money.

But now, its meme run may be coming to an end.

Knowing how to spot the end of a meme run is an important skill to have as a trader of this wild market. It’s a sure-fire way to protect your investments…

And keep your returns asymmetrical.

Now, speaking of AMC – it looks like an institutional buyer is already hedging his or her own position as the stock gets ready to drop…

Impact Money Trade

Among the stocks seeing unusual attention in the option pit today is our good friend AMC.

The shares are rocketing even higher today, last seen up another 15.5% to trade above $55, as the so-called “meme stocks” continue to receive attention… for now.

Click To Enlarge

AMC data courtesy of Trade-Alert

Against this backdrop, it looks like one deep-pocketed trader is picking up some relatively inexpensive hedges, with nearly 6,250 deep out-of-the-money (OTM) August 5 puts bought to open on AMC today. These puts won’t move into the money (ITM) unless the shares drop below $5 by August options expiration.

VIX Traffic Light

Just like last week, we’re looking at a red light today as volatility continues to drop.

Today, the CBOE Volatility Index (VIX) sits just over 17. But remember… I expect it to lose 2 more points by the Fourth of July, dropping to sub-15.

We’re looking at a good month ahead for the S&P, with stocks smooth sailing their way to new highs soon.

Which is good news for our put position on the UVXY – which, by the way, sits at about a 38% gain after less than one week.

You can track that put position – and the rest of our Profit Takeover trades – right here.

Mark’s Watchlist

  1. Ford Motor Co. (NYSE:F)

We saw big money flow into F at the end of last week, with 20,041 contracts of the January 2023 $4.00 puts being bought up at once. With the stock at $15.70, these puts are way OTM… signifying a yield play.

Now, I like F in the near-term. Given how far the stock has gone (it’s up almost 85% year-to-date), volatility is relatively inexpensive. And I’m looking at the $17-$22 July call spread for only about $0.50 for a really inexpensive bet on F continuing its hot run.

  1. ProShares Ultra VIX Short-Term Futures ETF (BATS:UVXY)

UVXY has been on my Watchlist since the ETF’s reverse split – and that’s not just because we have a winning position on it right now.

Last Thursday, we saw two giant VIX put buys from institutional buyers. On Friday, the eight biggest trades in the VIX were all put buys. Clearly, we aren’t the only ones looking for downside action in volatility – the impact money just confirmed it.

The UVXY is the best way for retail traders to play this downside action. It’s lost six bucks in the past seven trading days – that’s almost a dollar a day! And we’re already leveraging the drop into an asymmetrical return.

  1. Bank of America Corp. (NYSE:BAC)

Volatility in BAC has already returned to pre-pandemic levels. Up 43% year-to-date, BAC is ready to go higher.

As one of my favorite bank stocks, I’m looking for a way to play this name without falling victim to high volatility. So, I’m searching for the cheapest option possible with the most time to expiration.

And I found the September $47-$50 call spread for under $0.50.

That’s all for today, folks. Want to see your question featured in the next Profit Takeover article, just like Ferdous’ was today?

Send me anything you want to know right here – questions from readers like you are exactly what helps me put the financial power in your hands… where it belongs.

Until next time,

Mark Sebastian


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