How to Win Money From the 'Meme Stock' Crowd

Today's 'new' investor is not like the old ones... More people are trading options than ever – and don't know what they're doing... How to win money from the 'meme stock' crowd... Give Doc's Retirement Trader a try...

Today's 'new' investor is not like those of past generations...

Far from it.

You see, for the longest time, most folks of working age who had enough money to start investing – if they didn't have a pension – had a 401(k) in some type of balanced stock and/or bond fund.

As you might know, as passive investing in index funds caught on over the past few decades, the most widely accepted asset-allocation plan for retirement became a piece of blanket, simple math advice...

You should subtract your age from 100... The difference is how much you should have in stocks. The rest should be in safe bonds. This has been the advice so many people have heard over the years from many financial advisers.

Basically, this is the same idea behind the conventional "60/40" stock-bond portfolio or "target date" retirement funds, which as you also might know, have been losing money this year... We've been warning this would happen since the middle of last year.

Regardless, this simple equation – subtract your age from 100 and invest that percentage in stocks – has been the standard for investing for retirement.

Many folks have known nothing different... and because stocks and bonds have largely traded higher over the last several decades – yes, with crises and crashes along the way – the strategy has worked for many, too.

Sure, there were some investors who held a few individual stocks in their brokerage accounts. But they mainly owned blue-chip stocks like Coca-Cola (KO) and Microsoft (MSFT)... and they never planned on selling.

But this new "investor" I (Jeff Havenstein) am talking about is much different...

Many are young – yes, many are millennials and GenZs, and also know nothing different than what they've read or been told about the markets... So my point is, they're less inclined to use a buy-and-hold strategy like previous generations.

And they're certainly not interested in any kind of bond fund.

Instead, they want to be in and out of risk assets. They want fast gains... all the time. With millennials, that's just the way it is. Blame it on them growing up with the Internet and social media, but the pursuit of instant gratification is a defining feature of their lives...

On December 11, 2014, this reality converged with technology – and a new investor was born...

That's the day the brokerage platform Robinhood hit the app store...

After two years of development, $16 million in funding, and 500,000 waitlist signups... commission-free trading was finally introduced to the world.

It was a radical notion at the time.

Investors were accustomed to paying fees every time they placed a trade. Another one of those "it's always been that way" things... mainly because it's how Wall Street brokers made their six- and seven-figure salaries.

Consider the story of stockbroker Lou Barberini from this Wall Street Journal article in 2019...

When Lou Barberini started selling stocks in 1983, his job was to cold-call prospective investors with the chance to get into something hot. His take... $200 in commissions per trade.

Back then, brokers sold stories as much as they sold stocks. What was hot, he said, was often determined by crafty brokers at Lehman Brothers and then leaked down Wall Street where the same story could be spun for months... The entertainment company MGM was a big one: The studio would spin off its movie library, the sales pitch went, just as the VHS tape made its way into America's living rooms.

"You sold the sizzle, not the steak," said Mr. Barberini.

Robinhood's app shook things up...

It was a direct threat to brokers making fat commissions from hawking hot stocks.

For one thing, investors today, and at the time of Robinhood's launch, have practically unlimited data at their disposal, if they know where to look. They didn't need to rely on brokers for information.

Second, folks could make trades anywhere by using Robinhood's free app on their smartphone. And they made these trades commission free...

Robinhood was an immediate success. The company, which is now publicly traded as Robinhood Markets (HOOD), doubled its user base from 2016 to 2017. Then it shot up 200% the following year.

In 2021, the number of Robinhood users was at 22.7 million. Take a look...

It was only a matter of time before the competition had to follow suit...

The big-name brokerages couldn't keep hemorrhaging users to Robinhood. They needed to cut commissions just to stay alive.

Charles Schwab (SCHW) was the first major broker to take the plunge. In the fall of 2019, the company announced that it was going to scrap commissions for trading stocks, exchange-traded funds, and options.

Shortly after Charles Schwab's announcement, rivals TD Ameritrade and E-Trade cut commissions as well. Now, just about every major broker offers commission-free trading.

Put simply, what Robinhood did was a game changer for anyone with money in the markets...

And because of how easy it became for anyone to place a "free" trade – free, except for the inherent risk you take of course – the old adage of "trading less is more" was thrown out the window.

With no more fees, the floodgates were open to folks who wanted to buy in the morning and sell by late afternoon.

These traders would still be dinged on short-term capital-gains tax, if they made a profit. But no commissions turned a lot of people who had no prior interest in investing into day traders overnight.

We saw this in spades during the start of the pandemic, when it seemed like everyone with an Internet connection and a stimulus check at least considered speculating in the markets...

I can see why... If you haven't been a short-term trader before, there's no greater rush of nailing a short-term move in the market. It's addicting...

But it's a tough game to play.

All these inexperienced and naturally greedy traders, in what can be an unforgiving market, also present an opportunity for anyone who takes even a little time to really learn how to trade smartly... And that opportunity is to make a lot of money.

It's like taking money from a baby, in fact. Let me show you how and why...

Try to picture this new type of 'investor'...

I'm not poking fun at anyone with what I'm about to say next. But this description was the first thing that popped into my mind. Plus, I know a few and they fit this mold to a tee...

These "investors" roll out of bed right as markets open... They manage to plop down on their couch and the first thing that do is scroll through Twitter (TWTR) and Reddit, looking for the next big speculation.

Then they pull up Robinhood on their phone and start their trading day. And of course, they hang on to every word that Elon Musk utters.

I'm stereotyping – kind of. But you get the idea... Here's the important point... These "Fin Twit" (Financial Twitter) and Reddit traders – whether they trade from bed, the couch, or an office – are a big force in the market today.

Just think back to the GameStop (GME) fiasco. Fin Twit and Reddit traders were able to send shares of a cash-bleeding company soaring. They coordinated a buying spree on an online message board that triggered a short squeeze like we've never seen before.

Or think back to the rise of the Dogecoin. This cryptocurrency, which started out as a joke by the way, hit the message boards in April and May of 2021. Its price jumped from just a few cents to 64 cents in early May.

Commission-free trading has given more power to individuals rather than the brokers. And since this new group of traders has experienced big gains in very little time in things like GameStop and cryptocurrencies, they're hooked.

They want more.

The 'meme stock' crowd has turned to the options market...

The options market is notorious for attracting young, eager, and greedy traders.

After all, trading options – a way to bet on the price of a particular stock to go up or down by a specific dollar amount over a specific period of time – provides leverage...

As I'll explain, there is a smart way to trade options. But for most new traders looking for quick easy gains, there is more risk and potential rewards (or losses) when buying a call option than there is when buying or selling regular shares.

An options contract represents 100 shares... Using speculative options, you can quickly turn $200 into $2,000 in a matter of days or weeks if things go well...

As an example, if you buy a stock worth $50 and it goes up $5, you'll make 10%. But if you bought a speculative option on that same stock, your gain would be around 300% if the stock goes up 10%.

There's been a boom in options trading...

And it hasn't gotten enough attention... I certainly haven't seen it in the financial media...

The chart below shows how single-stock options volumes are now bigger than regular stock volumes for the first time ever...

Take a look... Options volume, as a percentage of stock volume, is now close to 120%...

In other words, more people are trading options on a stock than buying shares "the old unleveraged way"... and more money, in nominal terms, is being traded this way...

Average daily value for U.S.-listed single-stock options has more than doubled since 2020 alone...

There is a simple explanation for this...

Before commission-free trading, options were used mainly by big banks and hedge funds. Options trading was much more difficult for everyday investors to access... and it was basically reserved for the elite who could afford to pay the commissions.

Commissions hurt the little guy too much when they were trading just one or two contracts, compared with the hundreds of contracts Wall Street firms typically trade.

Banks and hedge funds used options as market hedges to speculate on certain stocks, and to generate ultrasafe income. Basically, options gave professionals an advantage over regular buy-and-hold investors.

But today, the everyday investor is getting involved. According to data from market intelligence company Alphacution Research Conservatory, retail investors now account for more than 25% of options-trading activity.

And here's what I find unfortunate... but also an opportunity...

Many new option traders don't understand how options work...

As a result, they are getting themselves into trouble. They are being too speculative and greedy. It's too easy to do...

The surge in retail options-trading activity is most prominent in meme stocks like GameStop and AMC Entertainment (AMC).

Last December, the CBOE Options Exchange, the largest options exchange in the U.S. – think of it as the New York Stock Exchange, but for options – analyzed all customer volume in the top 15 meme stocks by order size.

Early last year during the height of the meme stock mania, options trades with an order size between one and 10 contracts reached more than 1 million trades per day in the top 15 meme stocks.

You won't see big banks or hedge funds make that small of a trade. That's how you know it was retail investors.

Trading volume grew even higher as the year ended. Take a look...

I grit my teeth every time I see these figures.

I've been fortunate enough to work for Dr. David "Doc" Eifrig for the past few years.

As far back as the 1980s, Doc was on the derivatives desk at Goldman Sachs (GS), where he created cutting-edge investment strategies using options... and I've seen up close here at Stansberry Research how Doc has taught thousands of people to trade options the right way.

Today's new generation of investor is using options wrong...

I was reminded of this again while playing golf a few weeks ago...

Doc has said for years that you can gauge market sentiment by talking to folks at cocktail parties and in taxis or Ubers... I'd add conversations on golf courses to that indicator as well.

A few weeks ago, on the 14th-tee box at a beautiful course in Scottsdale, Arizona, the banter between my golfing buddies turned from missed par putts to investing, as it can often do given my line of work.

One guy in my group – let's call him Brad – couldn't hit a fairway to save his life. But that didn't dampen his hubris... or stop him from boasting about how much money he was making in the markets by "selling covered calls" – a basic options strategy.

This is something I know a lot about...

If you're not familiar with covered calls, it is one of the safest strategies you could ever use as an investor. I would recommend every investor to start doing it immediately...

I won't get into every single detail right now, but...

By selling options this way, you actually have less risk than a buy-and-hold investor...

This is one of the myths about options... They're so dangerous. But that's simply not true... If you know what you are doing.

I outlined the very good reasons for selling covered calls in a Digest back in April 2020, at the start of the pandemic when market "fear" was at extreme levels...

When investors are fearful, they are willing to pay for portfolio "protection." Specifically, they pay up for option protection.

Right now, options are extremely expensive... And that makes it the perfect time to sell them...

By selling options, we get to collect massive payments upfront and the only risk we take is the potential obligation to buy stocks we want to own for much less than they are worth.

We basically take advantage of the extreme amounts of fear in the market.

At its most basic level, I'm talking about making income – up front, as if you were running an insurance company yourself – from trading options on stocks that you like.

If you want to read more, go back to that essay from 2020.

I shared a specific example involving one of my favorite stocks, Waste Management (WM)... and I explained how the strategy of selling options works in the market... or how it should work if you want to make money over the long run.

That's what we've been showing people how to do...

Just like two years ago, there is a lot of fear in the market right now...

Even many new investors who don't know what they're doing on Robinhood are concerned about a bear market or a recession... We have historic inflation... and the outcome of a war in Eastern Europe directly and indirectly involving many major global powers is unknown.

Many people are scared, but not me...

For me, I see this as a great time for someone to sell options... again, if you know what you're doing.

Most people are scared of the world "options," but it doesn't take a lot of time to learn how to trade them, frankly, if you have the right teacher.

Unfortunately, Brad did not know what he was doing...

He's the "new kind of investor" I was talking about earlier...

He was selling covered calls on popular meme stocks – mainly on AMC – which is exactly what you shouldn't do. The one key to this simple strategy is to use it only on stocks you want to own, even if your trade doesn't work out as planned.

As my colleague Dan Ferris has written about before, AMC is a dumpster fire... It's a failing movie-theater owner whose shares have been driven up by frenzied hordes of speculators.

Also, it's important to point out that Brad is an MBA who works at a venture-capital firm in San Francisco... He's no dummy. But he couldn't resist the small fortune that he could make by selling AMC covered calls.

The money is definitely there... For example, selling a June expiring covered call on AMC would earn you about 28%, which comes to 140% annualized.

I tried to hold my tongue as Brad was bloviating about his AMC gains during my back swing. I really did...

Over the next few holes, I tried to reason with Brad and teach him the proper way to use options – and the proper stocks to use them on. But I realized my message was falling on deaf ears. All he could see was the potential dollar signs.

To this day, I'm amazed how someone so smart could turn one of the safest trading strategies you will ever find into something that has significant risk. But it happens...

While his covered call gave him less risk than if he just held shares of AMC, there's still a chance the stock could end up sinking to zero in a few months, which would leave him in a hole on the trade that could take many years to recoup.

AMC recently bought into a gold mine for heaven's sake.

I asked Brad if he would like to own shares of AMC one day... His answer was a resounding no. One more try... Brad, if you're reading this, please stop.

If you take no other lesson from today's Digest, let it be this...

One of the main principles of successfully selling options is to only sell them on stocks you love and would be willing to own.

If you stick to that one principle alone, you'll win on just about every trade you make using the strategy... and, as Doc has explained to thousands of folks for over a decade, generate steady income in the process.

You can learn more about that here...

Thanks to commission-free trading, there are thousands of 'Brads'...

They are blinded with greed...

And to be clear, it's perfectly fine to use options to speculate. You could throw a few hundred bucks into a speculation and if it works out, you could end up with a few thousand dollars.

Or you could lose it all.

As long as you are aware of all potential outcomes, by all means, try to win big.

But you shouldn't be doing that with your rent money.

Instead, you should be selling options and reducing your risk. Most folks simply don't even know this route exists, or if they do, they don't take the time to learn it... but selling options is one of the greatest income-collecting strategies of all time.

That's what we do in Retirement Trader, one of our options-focused trading advisories. Doc shared this with you in last Thursday's Digest... where we talked about how long his "playoff beard" is getting, given the 116 straight winning trades we've made the last few years...

This remarkable track record goes back even longer...

From 2010 to today, we have closed a total of 643 trades... and 603 of them have been winners. That's good for a win rate of 94%... a record that's unmatched in the trading world, as far as I know.

Earlier this month in Retirement Trader, we showed subscribers how to make a minimum of $450 in just a month and a half. The gain can be more depending on how much money you decide to put in initially.

And this Friday, we are releasing the details of a new trade that will give subscribers a minimum of $340 in just two months. Again, the potential profit will scale higher depending on how much you put into the trade.

The bottom line is... the flood of new options traders and the "meme stock" crowd is actually good for our options service.

In Retirement Trader, we take the other end of speculative bets...

In other words, there are buyers – betting on price action – and we are the sellers, allowing them the opportunity to do it... and collecting money at the same time. As Doc often says...

This is hands down my favorite income strategy and the single most valuable moneymaking secret I discovered during my decade working on Wall Street.

And, here's another lesson I want to make sure I leave you with... There is easy money to be had when the person you are betting against has no clue what he is doing.

For all these reasons and more, Doc recently sat down on camera to explain why now is one of the greatest times in the market to use this strategy.

As I said, it's one he's taught to thousands of investors over the years. And the best part is, it's simple to learn... and can make you a lot of money in an uncertain market. Click here to learn more now.

New 52-week highs (as of 4/20/22): AutoZone (AZO), Centene (CNC), Dollar General (DG), Enterprise Products Partners (EPD), FMC Corporation (FMC), Franco-Nevada (FNV), General Mills (GIS), Huntington Ingalls Industries (HII), Hershey (HSY), Johnson & Johnson (JNJ), Kinder Morgan (KMI), Coca-Cola (KO), Leidos (LDOS), Altria (MO), Invesco High Yield Equity Dividend Achievers Fund (PEY), Raytheon Technologies (RTX), Rayonier (RYN), Constellation Brands (STZ), Suncor Energy (SU), Viper Energy Partners (VNOM), Westlake Chemical Partners (WLKP), Walmart (WMT), Wheaton Precious Metals (WPM), and Consumer Staples Select Sector SPDR Fund (XLP).

Our inbox is filled with your takes on the trouble on American railways that we wrote about in yesterday's Digest... Keep your comments and questions coming, as always, with an e-mail to feedback@stansberryresearch.com.

"I read in the Stansberry Digest yesterday about Union Pacific Railroad limiting the number of cars available to certain interests. I cannot be the only person who remembers something eerily similar happening in the 1957 novel Atlas Shrugged.

"If you've read the book, you know how well that turned out. I don't know if Ayn Rand was that prophetic or it's just a case of life imitating art." – Paid-up subscriber Michael B.

"When you see something of this magnitude and with the seriousness of the implications, I would suggest including a link to Congress so consumers can express their outrage at such tactics.

"As a master gardener doing a nonprofit project to bring container growing technology to cash-strapped urban dwellers, I am outraged by Union Pacific's decision! Farmers need all the help they can get to raise product to market. Union Pacific needs to do better!

"I will be on the phone tomorrow to my legislators..." – Paid-up subscriber Cynthia T.

"Can someone please explain to me how there could be a locomotive shortage?

"Were many recently retired due to service life issues, were they sold to competitors, have they become rust buckets, were they stolen by train cyber-thieves, or possibly vaporized by aliens?

"These stories can't get any stranger – or maybe they can!" – Paid-up Subscriber Bernie M.

"What the Union Pacific does not want you or its shippers to know is that there is no locomotive shortage. They have hundreds of locomotives in storage in a number of locations including Grand Junction, Colorado and Little Rock, Arkansas. Riding the Amtrak Zephyr through Grand Junction, you can see many tracks loaded with engines in storage.

"They are deemed as 'excess power' not needed now that UP has adopted Precision [Scheduled] Railroading as their operating basis to lower the operating ratio. Operating ratio [expenses as a percentage of revenue] is everything in the railroading business. This has been great news to Wall Street as it provides for higher profits. They run fewer but longer trains which results in the need for less motive power and far less crews.

"When they adopted the precision railroading method, with far fewer trains, they eliminated many operating employees which reduced costs and lowered the operating ratio. Many of those laid off found other jobs so the UP is struggling like many others to find new employees willing to work round the clock to operate the trains..." – Paid-up subscriber Alan G.

"In regard to the railroad shipping problems you spoke of 'Union Pacific and shippers.' I work for the KCS [Kansas City Southern] railroad, 30 years, and I can tell you all the railroads are in similar situations. The truth isn't exactly what is being reported, however.

"There is no shortage of locomotive power. There is plenty of power in storage. Do a Google Earth of some storage rail yards and you will see. Neff Yard in Kansas City is a Union Pacific yard that has been 'closed' and is full of engines and cars that are in storage.

"As far as manpower, this is also misleading. During the pandemic the railroads saw an opportunity to rid themselves of many employees while business was down. Now they are short. The remaining employees have been pulling the weight. Harsh attendance policies are being put into place to keep people working crazy hours.

"The railroads dream of total automated trains without people... They have found themselves a little stuck because they don't want more people, they want less. They are also having trouble hiring people as well. The word is out that this industry is no longer a good place to work. On my property we have a less than 30% retention rate.

"I will also throw a little bit of theory at you. The railroads are currently being called in by the Surface Transportation Board over their inability to move freight. I would be willing to bet they use this as an opportunity to provide the solution to the problem they created.

"'Mr. Government, if we the railroads could just implement this technology, that is not fool-proof at all, and get rid of at least one of the two people on the train...'

"The bottom line is 'PSR,' Precision Scheduled Railroading, which Wall Street loves because they don't truly understand it, is destroying this industry! It is a utopian concept! I have seen a lot in 30 years and I'm a fourth-generation railroader. This is the worst it has been and we are far from bottoming out." – Paid-up subscriber Jason B.

Regards,

Jeff Havenstein
Baltimore, Maryland
April 21, 2022