The stock of embattled retailer GameStop soared when one meme-stock investor touted the stock last month. Now that investor, Keith Gill, has revealed a $181 million stake in GameStop, and it includes not only stock but also options, which could skyrocket if the stock rises strongly.
Here’s what it all means for GameStop stock and how Gill is poised to potentially earn millions.
Roaring Kitty’s GameStop investment explained
Known as The Roaring Kitty on social media platform X and DeepF******Value on Reddit, Gill’s account released a photo of what appears to be his GameStop holdings. It consists of two parts:
- 5 million shares of GameStop purchased for $21.27, worth approximately $116 million at the time of the post.
- 120,000 June 2024 $20 call options purchased for about $5.68, worth nearly $66 million at the time of the post.
These options allow the owner to purchase 12 million shares of GameStop stock at $20 per share by the June 21, 2024 expiration.
A significant move higher in the stock would be profitable, of course, but the call options add rocket fuel to the fire. For example, with every $1 move higher in the stock, the stock position rises $5 million. Meanwhile, the options position would rise $12 million in value for every $1 move higher in the stock, all else equal.
Gill helped spearhead the massive rally in GameStop stock at the end of 2020 and the start of 2021, sending shares hundreds of percent higher. Gill’s X account suddenly became active in May, after years of lying dormant, helping spark a rally in GameStop and so-called meme stocks.
Meme stocks are stocks that may seem to have limited fundamental value but that nevertheless soar in price when they’re touted on social media. In some cases, traders propelled these stocks into a “short squeeze,” sending the stocks much higher as short-sellers – those who have bet against a stock – are forced to buy the stock or risk losing a ruinous amount of money.
Other popular meme stocks include AMC, Blackberry and retailer Bed, Bath & Beyond, which declared bankruptcy in 2023. Social media helps create a herding effect in such meme stocks.
Watch out for meme stocks
While it’s fun and games for traders when meme stocks are soaring, it can prove dangerous for those looking to make a quick buck. Traders have to face at least a couple of dangers, notably the stock’s volatility but also – in many cases – its potential lack of fundamental value.
For example, GameStop spiked higher in May when Gill posted that month. Traders swarmed to the stock, sending it above $64 per share in days. As the furor settled, however, the stock fell back below $20, where it had been trading for much of the year. The whole episode lasted just a week or so, meaning those who held on looking for a further jump likely lost money.
This kind of volatility can come and go, as shown here, with Gill returning to social media and stoking the dreams of traders. As interest fades, so does the stock price.
But for investors, this kind of stock can be detrimental to building wealth. Investors – those who take a buy-and-hold approach to building wealth – typically look for companies with solid fundamental value. In other words, they look for companies where the price is well-supported by the operations of the business, not one that’s soaring on so-called “animal spirits”
This crowd of investors is more likely to flock to such consistently strong companies as those in the Magnificent 7 Stocks, such as Apple, Amazon and Microsoft.
For those building long-term wealth, it’s safe to ignore the GameStop noise, fascinating though it is. Legendary investor Warren Buffett has long advised that most investors would be better off buying an S&P 500 index fund and adding to it over time rather than chasing stock fads.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
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