Meme stocks offer the promise of glory for retail investors who are interested in speculating on potential movements of stocks like Roaring Kitty, AMC, or GameStop. However, few will come out on top in the end, with the victories mostly being limited to retail traders who get in on the stock right at the beginning of its ascent or those who have a substantial influence on social media, who can steer the direction of the hype.
While there’s a big temptation to secure some quick and easy profits through meme stocks and YOLO options, there are only a few who succeed and thousands who end up losing their money when the value of the stocks crashes after the hype has waned. So what is really going on behind the hype? That is what we will be addressing in this guide, which will give you a deeper understanding of how meme stocks and YOLO calls work.
What Are YOLO Calls and Meme Stock Options?
Meme stock options refer to options that are tied to stocks that gain attention and become popular by means of social media sites and online forums. Meme stocks are known for being hyped up online, and this results in rapid and dramatic price increases that are completely unrelated to the company’s fundamentals. YOLO calls are the types of options contracts you see meme traders using on these stocks.
Meme Stock Examples
A few good examples of stocks that are considered “meme stocks” include AMC Entertainment, Tesla, Bed Bath and Beyond, GameStop, and National Beverage. These companies began to get more attention in the options and stock market as the meme stock phenomenon began to take hold in 2020 and came into the mainstream conversation when the short squeeze on the GameStop stock occurred in early 2021.
Understanding YOLO Calls
“YOLO calls” refer to a risky and highly speculative trading strategy where investors seek quick returns in a short timeframe by not betting on a company’s long-term performance or fundamentals but instead focusing on predicting where public sentiment and money will ultimately flow. These calls are typically out-of-the-money and have near-term expirations. How this ties into meme stocks is that YOLO calls are the ideal fit for trading stocks based on their social media hype instead of a focus on the company’s fundamentals.
Note: YOLO stands for “you only live once” and perfectly describes the nature of these call options, where traders are going all in on their bets and pursuing them with reckless abandon.
The Typical Reddit/WallStreetBets Playbook
As already established, meme stocks and using YOLO call options to trade them are based largely around momentum trading and social sentiment, while looking at the company’s fundamentals. The way you see Redditors trade meme stocks involves analyzing short-term interest by pinpointing stocks that have been heavily shorted and then creating a “short squeeze” where investors who have bet against the stock are forced to buy back their shares at a higher price. To guide their decisions, meme traders on Reddit will consult social media and subreddits to find meme stock trading opportunities and to get a gauge for public sentiment around those stocks.
The Harsh Reality behind the Hype
While many traders have had success with trading meme stocks, there are a ton of downsides to this form of trading, where investors willfully ignore the company’s fundamentals and long-term performance. We’d like to showcase for you what is really behind the meme stock hype in many cases and how these investments can present a lot of risk for traders who aren’t looking at the complete picture.
- Low Probability of Profit: While it seems like a flashy and exciting form of trading, most YOLO calls expire worthless. These trades are highly speculative and, because they aren’t focused on fundamentals or the broader picture of what’s going on in the market, they result in traders making ill-informed decisions, which puts them on the losing side of the curve way more often than not.
- Time Decay Eats Your Premium: The majority of YOLO calls are short-dated, and they can be highly susceptible to theta decay, which can destroy any value built up in the contract the closer it gets to its expiration date. If the market doesn’t move in the desired direction, the trader can lose their entire investment solely due to time decay eating the premium away.
- Volatility Trap: Implied volatility spikes that arise from the increased demand for meme stock options ultimately jack up prices, which make it more expensive for traders to get in on these trades, especially those who are late to the game. Over time, this can create a problem for traders because it can lead to a great reduction in reward potential, along with their premium possibly being affected by time decay.
- Poor Risk Management: The big failing of meme stocks and YOLO calls is the fact that traders enter these positions with no exit plans and an all-in mentality, which doesn’t take risk management into account at all. Everything is based around hype and emotions, so this results in most traders losing their premium.
Why Meme Stock Options Are Even Riskier
What makes meme stocks and YOLO calls a risky endeavor? We have already dropped a lot of clues and hints as to why this is the case, but if you haven’t read the entire review, we will run through the main reasons to show you why they aren’t the best investments to pursue. Some traders might have luck trading these stocks, but they largely aren’t worth the time because there is too much volatility and irrational thinking at play.
- Meme Stocks are Irrational and Volatile by Design—These stocks are largely driven by online sentiment and social media hype with no regard to the company’s history, expected future performance, or current fundamentals. YOLO stocks are betting on where public sentiment might move next, and this can become super volatile. There might be no rhyme or reason for why the price moves, which makes it irrational and based on the whims of the public.
- Market Makers Hedge Aggressively: Market makers typically use hedging with other options instead of using the underlying stock when they’re dealing with meme stocks because they know the challenges associated with them and the risk of a short squeeze occurring. These hedging efforts by the market maker can create unnatural price swings, presenting meme stock traders with an uphill battle to profit using YOLO calls.
- Retail Traders Often Buy into FOMO after the Pump Begins: A lot of the growth that meme stocks see when traders begin to rally around them might not be representative of the true value, as there are plenty of retail traders who get FOMO and feel the need to get in on the trade, which can artificially inflate the price. Retail traders can get sucked into an investment where the bottom will likely fall out, and it gives unaware traders the illusion that the stock is a good investment.
Many traders chase high‑risk strategies driven by hype, particularly on platforms like Reddit. See our analysis on these most FOMO‑inducing options strategies. - Liquidity Can Vanish Fast: The ability to buy and sell meme stocks quickly falls apart when there is a decline in buying pressure and social media hype. Liquidity begins to wane as the popularity of the stock wanes, and this can make for some painful exits. Traders will have to sell at a loss, or they might sell it and get a lot less money than they originally expected.
Psychology—The Real Driver of YOLO Behavior
Although pursuing meme stocks and using YOLO calls doesn’t result in a profitable outcome most of the time, and there isn’t any rational thinking involved in regards to the actual value and expected movement of the stocks and the companies themselves, what is it about these stocks and options that draws so many people in? As expected, a lot of the reasons many retail traders go after these “opportunities” are for irrational reasons that are largely rooted in a misunderstanding of how options are supposed to work, chasing a high, and getting validation from strangers on social media.
- Dopamine: Pursuing meme stocks involves chasing hype for excitement. There is the promise of big payouts if traders time their investments correctly, which can result in a dopamine release because of the dangers involved and the prospect of a major win.
- Social Proof: In addition, traders are driven to YOLO behavior in the pursuit of social proof. Traders copy the actions of well-known figures and “experts” on social media to reflect the “correct behavior” in the situation. Going after social proof also reduces the perceived risks involved with trading meme stocks because traders see it working for other people on Reddit or other social media platforms.
- False Belief in Lottery-Style Investing: Some traders like the thrill of going all in on these YOLO options, but this comes down to a fundamental misunderstanding of how trading works and treating it as a form of gambling. Although some elements of investing and trading revolve around betting on what the market will and won’t do, this form of lottery-style investing is based on hype alone and involves big stakes, making it the worst of worlds.
- Confirmation Bias in Echo Chambers like Reddit and TikTok: It is a well-known fact that platforms like Reddit and TikTok (especially Reddit) are mostly due to their algorithmic feed and the behavior of users. Sites such as these prioritize content that aligns with the users’ preconceived notions and existing preferences, so there runs a risk of confirmation bias in terms of trading ideas like meme stocks and YOLO call options.
Case Studies—Famous Meme Stock Options Gone Wrong
Now let’s take a look at some of the best examples we could find of meme stocks and how they created chaos in the stock market, resulting in many traders losing their money. If anything, this section of our guide on meme stocks is the perfect showcase of exactly why you want to avoid trading meme stocks based on hype or even legitimately trading them due to all the unpredictability at hand.
Example from r/GME
Let’s look at a quick example of someone who lost $50k on weekly GME calls, posting their story to Reddit.
“When GME spiked Thursday after hours, I was up about $50k. I lost it all on Friday and am back down to $0 profit. I’ve never lost this much in a day and I usually hate losing money. But this time is different. My bags are packed and I’m ready for this rollercoaster ride.”
—davthandgoliath (1 year ago)
Reddit Post from r/investing
Another decent showcase of how meme stocks can result in big losses for traders can be found on Reddit, with a story of an investor who lost $1500 investing in meme stocks in 6 days.
“I feel so relieved I sold all my shares this afternoon, even if it was at a big loss.
Last week, I invested about 6k into various meme stocks. I started becoming nervous a few days later so I liquidated a lot of stocks. However, I bought back a lot of GME yesterday after a dip and finally gave up today seeing that the bubble had already burst and it wasn’t a dip.
Can I live without $1500. Yes (In fact I even forgot to cash in a $1500 check for over a year). I’m only 23 and in grad school, so I like to look at each dollar very carefully. I’m also anguished at all the things $1500 could’ve bought me (a 75” flat screen TV, a plane ticket to anywhere in the world, etc. But 1500 is only about 3% of my assets so I’m trying to sweat this off and move on as quick as possible. But I learned not to jump on stocks based on emotion. At one point, I was even up $1000 but I got too greedy and look where I’m now.
On the bright side, my overall portfolio is only down $600 since New Years Day and I’m still up 20% since last february (compared to the S&P gain on 18%)”
—Ukrainepolandborder (4 years ago)
A Deeper Understanding from AMC Stocks
When meme stocks were all the rage back in 2020-2022, AMC Entertainment Holdings Inc. was a popular choice among retail investors who would coordinate on websites like Reddit to plan their speculative moves. What would typically happen when this stock was traded was that an AMC options spike would be followed by a rapid crash. It was a result of a self-reinforcing cycle of call option buying followed by further speculation and market maker hedging.
To give you a better understanding of what was going on in this situation, you have to know what a “gamma squeeze” is and how it impacted the AMC stock. The squeeze happened when there was an increased demand for AMC call options, which forced market makers to buy shares of the underlying asset to hedge their positions. The stock price was driven higher due to this rapid buying.
One of the big problems was that there was a ton of speculative trading going on where retail investors were actively buying AMC stock and call options, which resulted in the stock price going up, but it had nothing to do with the company’s health and overall performance. It all had to do with hype in online spaces like r/WallStreetBets. As the stock price continued to increase, market makers had to keep buying more shares to maintain their hedges. At a certain point, the buying pressure ended, and the stock ended up crashing completely, going way down in value.
Smarter Alternatives for High-Risk/High-Reward Plays
We cannot tell you what to do, but we would suggest staying away from meme stocks, if only for the fact that they treat options trading like a lottery and their “value” is only supported by public hype on social media echo chambers like Reddit. If you are serious about learning as much as you can about legitimate online options trading, we would suggest checking out these smart alternatives that involve plays that are high-risk but also high-reward.
- Vertical Call Spreads—This strategy involves the trader buying a call option with a lower strike price while also selling a call option with a higher strike price in the hopes of profiting from a moderate increase in the underlying asset’s price. This strategy comes with a defined risk profile, the max risk being capped at the net cost of the trade.
- Buying LEAPS Instead of Weeklies—Traders who want to get away from meme stocks but want to focus on high-risk, high-reward setups should turn their attention to Long-Term Equity Anticipation Securities that have expiration dates which are three to five years out. LEAPS can offer magnified returns compared to owning the underlying directly, but they also carry a significant amount of risk.
- Using Technicals to Time Entries with More Precision—Instead of being guided by the impulsivity that is characteristic of meme stock trading, investors who are looking to improve and learn should work technical indicators into their trading plan to improve their entries into new positions. Traders can use volatility levels and other technicals, for example, to get in on positions when the price is lower to maximize the profit potential.
- Risking Only a Small Amount of Capital on Speculative Trades—A far cry from the impulsive and lottery-style form for betting on speculative trades that is seen with meme stocks, traders should make a regular practice of using risk management techniques that prioritize the preservation of their capital. It can include diversification and hedging, but traders should make a habit of using only a small portion of their capital on each position (we recommend 1-2%).
Final Thoughts—The Difference Between Trading and Gambling
Meme stock YOLO options are rarely based on strategy—just hope. Real traders focus on probabilities, not moonshots. It might seem as if we are really dumping on the meme stock phenomenon, but it’s only because it isn’t a legit form of trading or investing. It really just is a form of gambling at the end of the day, completely irrational and not at all focused on the elements of stocks and other assets that give them their true worth.
“It’s okay to chase big wins—just don’t YOLO your future on hype.”
Think before You YOLO
We don’t consider meme stocks and YOLO call options a legitimate form of trading because the “strategy” is rooted in impulsivity, social media pressure, and a lack of regard for the stock’s fundamentals or expected future performance. We don’t see them so much as a trading strategy, as they are a warning of an investment you should stay away from.
Instead of YOLO trading, investors should consider simply learning how options trading works and learn to master some of the basic concepts to secure consistent returns over a long timeframe. Meme stocks and YOLO call options are largely used by uninformed traders who view the endeavor as a form of gambling, but if you’re serious about doing some real trading, we would encourage you to learn as much about legit trading as you can in your spare time.
Key Takeaways
- YOLO calls rarely win because they’re highly speculative. It can be difficult to gauge where public sentiment might shift next, not to mention gauge where the actual stock might move.
- Meme stocks and YOLO calls create a severe psychological trap where traders are driven by confirmation bias, a dopamine release that comes from the thrill of the investment, and chasing validation on social media platforms.
- Avoid meme stocks and pursue more legit alternatives like vertical calls or LEAPs options, which still offer the promise of high-risk and high-reward.
- Focus on long-term thinking over hype. Investing and options trading aren’t about “going all in” or playing your luck for a big win. It involves speculating on price movements in a research-based fashion.
