What We Can Learn from the Legendary Bond King's Foray into Options Trading

In a striking critique of the recent trading frenzy, where GameStop's shares skyrocketed 179% over two days and AMC's shares surged 135% before the retreat, Gross took to social media platform X to express his skepticism. "Gamestonk is passe," he declared, while adding, "Buy? Sell? Not me."

Gross strategy revolves around capitalizing on what he describes as “400% annualized volatility.” Specifically, he has been selling straddles—a combination of calls and puts—on these highly volatile stocks. An options strategy where a call and put with the same strike price and expiration are sold to collect premiums. This move exploits the sharp decline in implied volatility, typical after a volatility spike, to quickly realise gains. However, it's a high-stakes play with unlimited risk, as any significant move beyond these thresholds could lead to substantial losses.

For GameStop, Gross dislcosed that he sold $40 calls and puts, collecting a premium of $22 for the straddle. This trade is profitable if GameStop's stock price remains between $18 and $62 by the close of the trading week, with the maximum gain if the stock ends up near $40. He has employed a similar strategy for AMC, selling $10 straddles.

An options strategy where a call and put with the same strike price and expiration are sold to collect premiums. This move exploits the sharp decline in implied volatility, typical after a volatility spike, to quickly realise gains. However, it's a high-stakes play with unlimited risk, as any significant move beyond these thresholds could lead to substantial losses.

As of the latest trading session, GameStop shares closed at $48.75, having reached an intraday high of $64.83, while AMC closed at $6.85 after opening at $11.88. Gross's approach underscores the importance of understanding market volatility and the potential for profit in both directions of stock movement.

This isn't Gross's first foray into high-profile options trades. About seven weeks ago, he sold options on the stock of former President Donald Trump’s media firm, Trump Media & Technology Group Corp. At that time, Gross was betting that the stock would trade within the range of $45 to $95. The shares plummeted to $22.55 before rebounding to $53.40 by the close of trading on Tuesday. Gross has since exited that position.

“A genius can also be an investor with the courage to sell DJT options at a 250 annualized volatility,” he wrote on the social media platform.

In December 2023, AMC shares plummeted by 35% due to investor concerns about dilution following a court approval to convert preferred equity units into common shares. This substantial decline drew the attention of renowned investor. Gross highlighted the fall of AMC as another meme stock failure, recalling his April warning about the impending massive dilution of AMC shares. He noted that with the end of easy money, many speculative investments would collapse, referencing AMC's dramatic rise from $2.10 per share in early 2021 to an all-time high of $72.62 in June of the same year, before tumbling to $3.75 per share.

Gross also issued a warning about GameStop (GME), suggesting it might be the next to fall. GameStop's stock had experienced a significant surge starting in late 2020 and peaking in January 2021, propelled by retail investors from the Reddit forum r/wallstreetbets who initiated a dramatic short squeeze against hedge funds. While this movement underscored the power of coordinated retail investors via social media, GameStop's stock, like other meme stocks, has since lost much of its gains from the early 2021 frenzy.

Bill Gross's venture into options trading on meme stocks serves as a masterclass in leveraging market volatility. As the "Bond King" navigates this new terrain, his strategies offer a blueprint for those looking to profit from the unpredictable nature of today's stock market.