Reddit Investors, Speculators Pile on Hedge Against 50% Price Slump
Reddit's meteoric rise during its trading debut last week is spurring demand for protection just in case the uptrend reverses.
Investors and speculators are piling into put options that give the holder the right to sell $Reddit (RDDT.US)$ shares by April 19 at $25 each. That strike price is about 50% below Reddit's stock price of $50.47 as of 11:14 a.m. in New York.
Demand for a hedge against a potential price slump is soaring on Reddit options' first trading day at a time when shares of the social media site used by WallStreetBets are enjoying a 9.8% gain. That could provide a shield against a downturn for a company that aknowledged in its regulatory filing that it has "a history of net losses" and that it "may not be able to achieve or maintain profitability in the future."
The $25 put options are the most active options tied to Reddit shares, with about 3,470 contracts changing hands before noontime in New York. That compares with just three for call options that give the holder the right to buy Reddit shares at the same strike price with the same expiration date of April 19.
The stock has climbed from its initial public offering price of $34 amid optimism over the prospects of the company that grew its gross margins in the year ended Dec. 31 to 86% from 84% a year earlier. In its filing with the Securities and Exchange Commission for its IPO, Reddit reported its annual loss narrowed to $90.8 million in 2023, from $158.6 million in 2022.
Reddit said in that SEC filing on March 19 that its high gross margin and capital-efficient business model is simple and scalable, allowing the company to "invest deliberately."
Disclaimer: Options trading entails significant risk and is not appropriate for all customers. It is important that investors read Characteristics and Risks of Standardized Options before engaging in any options trading strategies. Options transactions are often complex and may involve the potential of losing the entire investment in a relatively short period of time. Certain complex options strategies carry additional risk, including the potential for losses that may exceed the original investment amount. Supporting documentation for any claims, if applicable, will be furnished upon request. Moomoo does not guarantee favorable investment outcomes. The past performance of a security or financial product does not guarantee future results or returns. Customers should consider their investment objectives and risks carefully before investing in options. Because of the importance of tax considerations to all options transactions, the customer considering options should consult their tax advisor as to how taxes affect the outcome of each options strategy.
Disclaimer: Community is offered by Moomoo Technologies Inc. and is for educational purposes only.
Read more
Comment
Sign in to post a comment
Moomoo Senior News and Community Manager
Former editor at Bloomberg, ex-commentary editor at Lazard. Posts aren’t investment advice. Views are just mine.
5776Followers
16Following
16KVisitors
Follow
charming Llama_7860 : No, someone is just selling puts during high volatility , knowing that those will expire worthless, might be you actually.
Kube charming Llama_7860 : This. Those puts are extremely cheap only 15 per contract so people are probably buying as lottery play. I'd do the same as the seller honestly. selling option > buying options.
BelleWeather : I don’t think those are hedges, per se. Certainly not all of them… heck, I’m in.
Luzi Ann Santos OP charming Llama_7860 : You're probably right. If Reddit stays on its upward trajectory, these puts will expire worthless. But there are also buyers on the other side, which is why the price of these options are up 200% now. @72974739 is also correct that these are really cheap, so it could also be a lottery play.
Luzi Ann Santos OP Kube : You're right. that these are really cheap, so it could also be a lottery play.
73916545 : why do you say meteoric? maybe we should ignore the hype so we don't get hit....? laugh out loud....?
73916545 73916545 : I'm a real person that just heard of Reddit
BelleWeather Kube : I bought one, but expect it will expire worthless. For me, it’s about community. The subreddit in which I spend far too much time, has a ‘positions or ban’ requirement. It’s a small price to pay to hang with my cadre of emotional (and emotionally unstable) brothers.