Meme Premium (Patreon)

Who's holding the meme stocks right now? 

I'm selling OTM calls on meme stocks.

While that may seem crazy, I generally tend to think the market compensates you in places where you're subjecting yourself to risks that no one else wants to take.

There's a small statistical edge in selling volatility through earnings. Why?

                                                                         Zuck getting fuk

Because events like this can happen. Why would anyone sell options if they weren't compensated in a small way? 

The variance risk premium is another perfect example of this. Index puts are systematically overpriced, because people generally don't want to hold the risk of a massive sell off. 

Think about the payoff profile of a short $SPY put- 

Capped gains and huge infrequent losses. Why would you want to voluntarily subject yourself to that? 

I just don't believe option sellers will write calls on meme stocks without some estimated buffer of edge. We all know these things can explode hundreds of percents in a matter of days. Why would anyone do that? 

That's not a rhetorical question. If any of you have ideas why someone would, I'd be interested to hear them.

OTM calls on meme stocks are very expensive right now. 

You can measure this with skew. Take BBBY's skew for example. the left side is OTM calls. The right side is OTM puts. 

Call and put deltas for the same strike always add to 100, so 10 delta calls are 90 delta puts. 90 delta calls are 10 delta puts - 

                                                                    BBBY skew structure 

Below is a chart of the change in skew over time. 

Negative values = Call skew - OTM calls are more expensive than OTM puts (this can happen when retail OTM call demand drives up prices) 

                                    Stocktwits is a good place to analyze retail sentiment

Positive values = Put skew - OTM puts are more expensive than OTM calls (this is usually the case with most stable stocks, because they move up like an escalator, down like an elevator) 

                                                           BBBY skew plotted over time 

You can get this chart from Predicting Alpha. I like it because it's the only place I've found that will plot things like skew over time. This is hugely useful, as it allows you to see how skew trends on different stocks. 

This skew tool (as well as some other stuff) was the thing that made me reach out to them to see if they wanted to partner. 

If you sign up using this link, you can get a 30 day, 100% free trial for Predicting Alpha. I can assure you there's never a better time to have access to these tools than when meme stocks are running.

You can even sign up, analyze the meme stocks, and then cancel without paying a dime. 

If you're looking for a free resource, I'd checkout Market Chameleon. The free version won't get you a comprehensive measure like this, but you might be able to pull something from it? 

If any of you know any better resources leave 'em in the comments. It's remarkable how difficult it is to find this stuff on the internet. 

If we look at how BBBY skew trends over time, we can see these periods where it drops down to around -3 (heavy call skew). 

You could almost structure a trade entirely around that. Buy the cheap OTM puts, sell the expensive OTM calls, and wait for skew to revert as we can see it consistently has. 

(Un)fortuntaley, TD doesn't let me sell naked calls on meme stocks..... 

This might be one of the rare times when TD's risk management department is making a good call.    

My plan is to sell that expensive OTM call premium on BBBY, as well as the other meme stocks using call credit spreads.

I decided to take positions in GME, BBBY, and AMC.

                                                         AMC April 8, 40/50 Call Credit Spread

                                                  GME April 8, 265/300 Call Credit Spread 

                                                  BBBY April 8, 33/45 Call Credit Spread

The strikes and expirations are kind of arbitrary. I'm short IV and bear/neutral on direction. Between calls and puts, I'm just guessing OTM call premium has the most edge. Generally speaking, skew is a measure of where the market is pricing risk. Wherever the risk is tends to have the most edge. 

For example, In stable companies / SPY, that risk is to the downside, which is why systematically writing puts performs better than writing calls.  

Shorter term options also tend to have more risk premium because of their exposure to the realized volatility of the underlying. I know I've used this screenshot before, but it really is a perfect example of how gamma can fuck option sellers incredibly hard. 

Before the meme mob comes for my head....

I'm not saying a short squeeze / gamma squeeze won't happen. I actually think there's a good chance it could happen again.

I'm just not bullish on all of them at once. GME and AMC at the time of the first squeezes had huge tailwinds in mainstream media and more interest from the general public.

The fact that selling OTM calls feels like a terrible idea kind of makes me think it will work. Other people evidently think selling these things is a terrible idea, which is why OTM calls are so much more expensive than OTM puts. 

From what I've heard, subjecting yourself to those risks (with proper position sizing) generally tends to work out decently in the long term.  

However for some reason I really feel like this is going to be the time when it implodes. My trades have been going too well in the Patreon portfolio.   

Portfolio Update

So much for all that "implosion of the global economy" talk...

If anyone needed any more evidence that finance content creators know nothing, this is it. 

I'm sorry but if you double down that many times and are still wrong you forfeit your right to not have me photoshop a clown outfit on you.