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4 tips for traders who want to leap into GameStop, other 'meme' stocks

Brian Sozzi
·Editor-at-Large
·3-min read

shares exploded once again

Before jumping back into the rocky waters of the meme stock trade, Wall Street veteran Troy Gayeski says momentum traders should remember four key things right now if they want to protect their money.

"More important for investors to understand is the industry [institutional investor] as a whole has done a triple check on what their short exposure looks like. Since then, there has been more focus on how crowded a particular short is. You want to avoid that when you can," Gayeski, who is co-chief investment officer at Skybridge Capital, told Yahoo Finance Live.

Gayeski added, "Two, is to move up in market cap [to minimize risk]. Three is to become diversified. Four is if you really are about hedging systemic risk — which is something that people are getting more concerned with given the high levels of equity multiples — there is nothing wrong with using S&P 500 futures or ETFs."

At least for the past 24 hours, traders in so-called meme stocks appear to be ignoring such sage advice. These heavily shorted stocks, especially the struggling retailer GameStop (GME), rose to fame in late January during a surge in retail trading volume on Robinhood and comments on Reddit helped drive up their prices.

A GameStop store is pictured amid the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, U.S., January 27, 2021. REUTERS/Carlo Allegri
A GameStop store is pictured amid the coronavirus disease (COVID-19) pandemic in the Manhattan borough of New York City, New York, U.S., January 27, 2021. REUTERS/Carlo Allegri

GameStop shares exploded once again 77% to $161 on Thursday, following a 104% pop on Wednesday. Traders have speculated that the resignation of GameStop'sCFO Jim Bell on Wednesday suggests big changes are in the works at the struggling retailer. Those changes may be driven by Chewy founder Ryan Cohen, who recently won three seats on GameStop's board and owns more than 12% of the stock.

Even with the latest pop, GameStop shares are still well shy of the $380 record high hit during the short-covering fueled buying mayhem that unfolded in late January.

Meantime, hopes for a complete overhaul at GameStop sparked similar optimism on other meme stocks such as AMC Entertainment (AMC) and Koss Corporation (KOSS). The reasoning: the volatile trading activity in these stocks the last five weeks could spur executive shakeups at the companies in question, too, amid their weak fundamentals.

AMC and Koss shares rose 11% and 55%, respectively, during Thursday's session.

But Gayeski suggests the renewed upward thrust in meme stocks would be short-lived. Hence, the need for traders to be more rational with these trades than they were during the January buying frenzy.

"So we expect short squeeze risk to be lower. Even those who had tiny positions in GameStop or meme stocks, they have closed those out," Gayeski said.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Find the latest in business and finance news here.

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