How institutional traders are getting in on meme stocks

Like it's 2021 all over again, meme stock trading has taken over Wall Street. While some have claimed there is very little rhyme or reason behind the momentum, it doesn't negate the sheer volume of trading from retail investors.

All Star Charts Chief Options Strategist Sean McLaughlin joins Yahoo Finance to discuss the recent return to the meme stock craze and how investors should consider getting involved.

McLaughlin comments on how institutional investors get involved in meme stock trading: "Especially in these meme stocks where you get a lot of retail interest and a lot of people chasing hot money returns, when you get players using call options, for example, to express their bullish bets, well, who's on the other side of those trades? That's generally market makers and dealers. They're shorting calls to sell them to the retail investor. Well, they're not in the business of taking directional risk. They want to be as delta neutral as they can. So as they're selling calls to the to the swelling demand out there, the only way they can hedge their position or the best and easiest and most efficient way for them to hedge their position is to buy stock."

For more expert insight and the latest market action, click here to watch this full episode.

This post was written by Nicholas Jacobino

Video transcript

The meme Stock rally is back again and our next guest has some thoughts on how to play the meme trade with us today is Sean mclaughlin chief option strategist at all stars charts.

Uh Sean, it's good to have you on the show.

One question I have for you, Sean just to start things off is I'm interested in, you know, whether we have line of sight, Sean to sort of who is driving this, you know, retail uh traders, hedge funds.

Is it a mix?

What can you tell us, Sean?

Well, I mean, we know from the last time, what, 23 years ago when we had the first Meme Stock run that was definitely kicked off by retail investors this time, it's not so clear, at least in my eyes, it's there's definitely retail trader participation, but now that we have, let's call it a playbook for how this plays out.

I would assume that there are a lot more deeper pocketed players uh involved in this move for sure.

Yeah, I mean, that's something we were sort of talking about earlier that it's not just the retail traders, it could potentially be hedge funds and others as well.

Um How is the options, trade feeding into all of this and maybe how does it differ from what we saw back in 2021?

Well, as we know options volumes especially for retail traders have exploded over the last five years.

This is not new news uh with the introduction of zero DTE options, of course, that brings a whole new level of interest and options and what tends to happen, especially in these meme stocks where you get a lot of retail interest and a lot of people chasing a hot money return when you get players using call options, for example, to express their bullish bets.

Well, who's on the other side of those trades that's generally market makers and dealers, they're shorting calls to sell them to the retail uh investor, right?

Well, they're not in the business of taking directional risk.

They want to be as delta neutral as they hand.

So as they're selling calls to the to the swelling demand out there, the only way they could hedge their position or the best and easiest and most efficient way for them to hedge their position is to buy stock.

And that naturally just drives further demand for stocks rises.

Uh you know, drives the prices higher and it just feeds on itself in a feedback loop right now, Sean, you know the names we've been talking about uh gamestop Blackberry A MC, I'm just interested Sean when you track you know, the call volume, the volatility, any sense sean of, of whether, you know, it's gonna, it's gonna stay in these names or, or is it gonna move to others?

Uh, I have to believe that it will move to others.

I don't have any particular insight on where it's going to go.

Certainly, uh, we have to keep on, uh, keep our eyes on names that are heavily shorted.

Certainly those are ripe candidates.

Uh, but, uh, I mean, right now it's the old names that are the playbook.

But, you know, this all got kicked off by, uh, by, uh, the kitty guy.

I forget his name.

Uh, roaring Kitty.

Correct.

Uh, it all got kicked off by him but he never specifically mentioned gamestop or a MC or any name.

You know, maybe, maybe everyone's misinterpreting what's going on here and maybe he's got a new, uh, uh, company he's been researching and that's gonna be the, the, the focus going forward.

Who knows it?

It's a wild west that we're operating in here and, uh, but it can be fun.

Uh, and certainly a, a as traders, we enjoy volatility.

That's the bread and butter for us to make money.

So, hey, if it brings more volatility in the market, bring it on, let's play.

I mean, yeah, I, it is, it does feel fun this time.

I guess it's fun until it's not right.

It's fun until you lose the money that you've put into something, I mean, and certainly stocks are still way down from where they were back at their peaks.

But Sean that sort of like cycle that you described a few moments ago about when there are a lot of uptick and call option volume.

And then you have the market makers, for example, buying the underlying what tends to bring a cycle like that to an end.

Um Well, sometimes there's a change in the narrative, right?

I mean, we saw that uh last time around, I think buyers typically exhaust themselves and especially if people are driving uh this this rise through the options market, the options market is kind of the tail is wagging the dog.

What ends up happening is the premiums in the options get so expensive that I mean, it becomes just such a hard gamble that you're paying so much premium that you really need an even bigger move from where you already are to see a realistic payoff.

And at some point, cooler heads prevail and say this is too much.

These are too expensive, I'm not buying here.

And that's when you see uh you know, buying power kind of evaporate and then you see the pullback that maybe exhaust itself.

We'll see if that happens until another drawing gets posted of someone leaning forward in a chair, Sean.

Thank you so much.

Appreciate it.