Few Diamond Hands in This HOOD

The meme stock fraternity got a new member this week.  Robinhood (HOOD) jumped nearly 25% on Tuesday, pushing it to close above its $38 IPO price for the first time.  Then we saw some truly astounding moves yesterday, with the stock nearly doubling in the morning before closing “only” 50% higher.  Today, we see shares declining on the news that insiders will be selling about 97 million shares.  The following chart tells the story better than I can:

HOOD 6 Day Chart

Source: IBKR

The news that propelled the shares seemed relatively mundane on the surface.  The main reason for HOOD’s stellar rise was that options were listed for the first time yesterday.  Some traders certainly bought in advance of that development on Tuesday.  It is also obvious that others were caught short on Wednesday, which would explain the spike shortly after the open.  That said, there was clear demand for the shares at higher levels throughout the session. 

The volumes in the shares and options were truly astounding.  Over 175 million shares changed hands yesterday.  That is over 3X the 55 million share float!  Over 100,000 options contracts traded yesterday as well, with over 75,000 in the August 70 line alone.  For much of the day those were out of the money calls, but the inexorable trading in those contracts – led by speculative buyers – eventually helped push the stock toward that level.

The traders who bet on HOOD simply because options were coming to market and then later because there was heavy volume in above-market calls were using a playbook that worked when GameStop (GME) and AMC led earlier rounds of meme stock frenzies.  The term “gamma squeeze” entered the financial parlance during those periods.  That is the phenomenon that occurs if enough buying materializes in out of the money calls even as a stock is moving higher, it forces the sellers of those calls to buy increasing amounts of stock to hedge as the stock rises.   (We explain the mechanics of a gamma squeeze in more detail in this article.)

It doesn’t surprise me in the least that HOOD became a meme stock (though I admit I neither warned nor took advantage of it).  One of the defining characteristics of a meme stock is that it resonates with enough individual investors and chatroom devotees that a groundswell of enthusiasm could arise.  When we consider that Robinhood was the vehicle that many individual traders used to ride the meme stock wave, of course it had the potential to become a meme unto itself.  That said, yesterday’s immense volume shows that it was not only individuals trading on HOOD that propelled the stock higher.  With so much trading, there had to be institutional traders jumping into the fray as well.  Furthermore, as of yesterday HOOD ranked as the 3^rd most actively traded stock on the IBKR platform, jumping from 8^th place the day before. 

Unfortunately, even as HOOD morphed from a stock to a “stonk”, its largest holders failed to demonstrate the “diamond hands” that meme stocks’ most fervent advocates claim to have.  While today’s announcement seems to have caught many by surprise, the potential for substantial additional selling was spelled out clearly in the company’s S-1 filing.  It was a rather unusual arrangement.  In short, the retail customers who were allowed to participate in the IPO were dissuaded from selling for 60 days, while employees were allowed to sell almost immediately.  One may want to consider who was supposed to have the “diamond hands” here. 

Furthermore, the “diamond hands” were not demonstrated by other meme stockholders.  I keep a page of meme stocks on my TWS, and HOOD was the only one that traded higher.  AMC was down 12% and GME was 5% lower.  I can only conclude that some of the fervent “HODLers” were selling underperformers to chase the outperformer.  This is not unusual behavior, to be sure, but it is at odds with the fervent beliefs offered in social media by many meme stock devotees.  Today, with HOOD lower, it appears that some of the money is flowing back into the “traditional” meme stocks.  Are meme stock traders just like everyone else, only louder and more aggressive?

Every time we think the meme stock phenomenon is fading, as it was over the past few weeks, it seems to return anew.  It’s human nature.  These have proven to be exciting and profitable trading opportunities, so of course traders would gravitate toward them using techniques that have proven successful.  Speculation creates winners and losers, and we have seen a microcosm of that notion in HOOD in its short life as a public company so far.