How to Meme Responsibly

First, please forgive the mediocre formatting. I am using my phone to write this post whereas I normally use a PC.

This post will discuss how I have managed my meme stock plays this month and achieved a degree of success. This is different than my failed approach in January.

In January, the method was ✋ 💎 🤚 all day. To sell your positions was to miss out on gains. Holding meme stocks through 40%+ swings prevented trading without emotion, and created plenty of bagholders.

This round, we should take advantage of the swings to scale our positions and reinvest more effectively. We must moon responsibly.

The Problem

WSB is full of people who started trading in April and believe every stock going up is a short squeeze. They believe a stock with 10% short interest trading with 15x its normal volume is just shorts covering. This mentality has leaked into our discord too.

Here’s the problem: most of these stocks like CLOV, BB, WISH, etc are not short squeezing. They may have as much as 25% short interest.

However, WISH, for example, has a short interest of about 40 million. Today, 360 million shares were traded. Even if all shorts covered, we still have 320 million shares changing hands. That’s 9x it’s normal volume. Once we factor in the fact that not all shorts covered, we see that this volume is not a squeeze and the stock is also perfectly liquid.

This is a retail pump. B-tier meme stocks are rising because lots of people are buying them. That’s it. WKHS going up 70% in a day is a profit taking opportunity.

The Solution

We can say with confidence that we don’t want to hold low-end meme stocks after a WSB pump. But we also don’t want to ditch a stock or call after a quick rise when we think it still has some juice left. So what do we do?

Take incremental gains that allow us to recover our basis as soon as we are comfortable. To “recover our basis” we are referring to selling a portion of our position that equals the value of our initial investment. By cashing out what we put it, we can ride the remaining “house money” to the moon (or watch it all burn) without having to risk our own money anymore.

There are a few methods to approach this. My preferred method is to sell a portion of the position to recover my basis, and then leave the remainder, or close the whole position and reinvest into buy-and-hold shares.

I employed these strategies effectively with WISH and WKHS.

Basis recovery on calls: On June 9, I bought 8x 7/16 WISH $40c for $80/ea. The stock rose sharply through the day and my calls doubled in value to $160/ea. I sold 4x of the calls to recover my initial investment. Now, I have 4x calls on WISH that could drop to $0 and I would suffer no loss.

Free shares method: On June 3, I bought 100x shares of WKHS for $14.46/ea and sold a $22cc for $200. The stock traded erratically throughout the day and my covered call dropped to $20, giving me $180 gain. My shares ended the week even and I closed for a $0.01/ea gain because I did not want to hold through the weekend. However I also didn’t want to completely abandon WKHS, so I used the $180 gain on the covered call to buy 11x shares. These shares are effectively free.

The above 2 approaches ultimately leave the investor protected from loss without abandoning exposure.

Determining when to employ

Depending on your goals, you should employ this method of recovering your basis at a particular interval of gains.

You do not have to wait until you have 100% gains to sell half. You can employ more aggressive or more conservative approaches to converting to risk-free positions. These are meme stocks we are talking about, so we should assume we are going to be more aggressive than usual.

Highly Aggressive: Recover your basis on calls at 200% gain by selling 33% of your position. If the stock continues to rise, roll your remaining calls to higher strikes to receive more Gamma.

Aggressive: Recover your basis on calls at 100% gain by selling 50% of your position. If the stock continues to rise, roll up your remaining calls to higher strikes to receive more Gamma. Alternatively: if your sale of 50% allows you to buy 100+ shares, then use the gain to buy shares and sell an ATM covered call while IV is still absurdly high.

Moderate: Recover your basis by selling 50% of your position at 100% gain. Ride the remainder of the position and reinvest any further gain into either shares of the underlying or sector ETFs.

Conservative: Recover your basis by selling 66% of your position at 50% gain. Ride the remainder and reinvest any further gain into buy-and-hold ETFs.

Cautious: You don’t have to wait for a particular gain percentage to recover your basis. You can recover your basis at 10% gain by selling about 90% of your position. You can recover your basis at 25% gain by selling 80% of your position. This will leave your profit in shares or calls that you can later sell for reinvestment into something more stable.

The effect of taxes

If you sell a position for a 100% gain, the IRS will want their cut. Since you owe taxes on that gain, you haven’t really recovered your entire basis.

If your remaining calls expire within the same calendar year, then using this strategy will not have any tax disadvantage. If your free position goes to $0 by expiring OTM, then that loss will balance with your earlier gain and you will not owe tax. If you sell the remaining position for a gain, then you will owe taxes just as you normally would have if you did not employ this strategy.

If you do not close your remaining position by the end of the calendar year, you will owe taxes on your initial sale. Unfortunately there isn’t much we can do about this. The IRS will not recognize that you sold half of your position and have the other half open. The IRS tracks each individual contract and share, so as far as they’re concerned, you doubled your money.

If you keep the remaining proportion of your position open through the end of the year, keep in mind that selling half at 100% gain doesn’t fully recover your basis because you will owe taxes on that money, cutting into the amount you recovered.