Has Reddit run its course?

The entire month of March and April, GameStop (GME) landed at the top of our TrackstarIQ search results.

It didn’t matter whether you were retail or an institution, everyone had these stocks on their radar.

And now…

landscape tumbleweed GIF

While AMC Theaters (AMC) still garners a good amount of interest, GameStop’s search volume is negligible.

Yet, both stocks held up remarkably well, trading in narrow ranges.

Does this mean the Reddit trade is over?

We think so. At least for the time being.

But let us explain our reasons why and see if you agree.

Why these stocks moved

Let’s start with a quick recap on how this all took place.

You had a bunch of traders gather together and buy up shares of GameStop, AMC, and other oversold companies in force.

They targeted names with high short floats. These were stocks where significant amounts of the stock available for trading had been sold short. 

In some cases, more shares were sold short than were available for trading!

When traders bought up the stock, they stuck these short sellers with heavy losses. That forced them to buy the stock back to close their positions.

All of this compounded into a wave of buying.

Today, the short float sits near 30% versus the 120% before the massive stock run.

So, the risk of such an outsized move occurring again is lower.

Understanding volume

Reddit traders demonstrated that collectively, they held enough buying power to move stocks.

That translates into volume, something we see less of these days.

This daily chart of GameStop shows the price action at the top and the volume in a histogram at the bottom.

Clearly, as volume increases, so does price action.

Compared to even the month leading up to the price surge, volume has dropped significantly.

Without volume, a stock is unlikely to make a meaningful move one way or the other.

Lack of option interest

If you read about Roaring Kitty, you’ll remember how he used call options to make his fortune.

Call options are leveraged bets that a stock will move higher.

The more demand for options, the greater the implied volatility (IV).

We can look at implied volatility on a specific stock over time to see what this looks like.

Here we have the same chart as before except the volume histogram has been replaced with a line graph representing the 30-day implied volatility (blue line).

The red line is a moving average to smooth out the peaks and valleys.

What you’ll notice is that implied volatility dropped significantly since April.

This means the demand for options on GameStop dropped.

In layman’s terms – less option demand means less interest and volume.

Our hot take

We’re not saying that the stock will never move again. What we are saying is interest in the name has returned to normal levels.

In the coming months, we expect fundamentals to start shaping the price action more than the Reddit group.

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