Roaring Kitty Live: What Are the GME Trading Strategies?

Roaring Kitty (Keith Gill) is scheduled to go live on his YouTube channel in six hours.

Back on May 13th, Gill posted a meme on X showing someone leaning forward in a focused gaming stance, suggesting a shift from casual to serious mode. This post led some traders to believe that Gill was gearing up for action again. This speculation triggered a surge in meme stocks, particularly GameStop (GME) and AMC Theatres, initiating another short squeeze rally.

Keith Gill holds a significant place in the minds of the public due to his leadership during the "meme stock battle" against Wall Street institutions in 2020-2021. By continuously sharing his trades and posting predictive commentary, Gill fueled retail investors' enthusiasm for GameStop, attracting substantial capital inflows and causing a short squeeze that inflicted heavy losses on short sellers. This epic showdown between retail investors and institutions was hailed by many as a "David vs. Goliath" battle.

Given the potential for significant price volatility in GME stock due to this event, there will likely be numerous trading opportunities. How can we best capitalize on them?

First and foremost, it's important to understand that this should be approached as a "trade" rather than a "long-term hold." The key principle here is "don't get emotionally attached." The massive volatility involved means that any potential gains could be quickly wiped out. Additionally, there's considerable uncertainty about whether this event might catch the attention of regulators, leading to a downturn.

Since this is more about trading, it's crucial to "cut losses quickly and let profits run." We need to evaluate which indicators have historically performed well during periods of significant volatility:

(1) Intraday Moving Averages: Use 10-Minute Over Daily
Analyzing the intraday moving averages from May 14th shows that daily moving averages are not very responsive. Using daily moving averages could easily lead to buying at high points and selling at low points. Instead, a 10-minute moving average is more effective for capturing the rapid movements in such a volatile environment.

However, if we shift our perspective and change the chart to a 1-minute interval while focusing on the blue moving average (10-minute moving average), we find that the 10-minute moving average serves as an excellent trend-following indicator. Although it might occasionally lead to errors, such as selling during sideways consolidation, it allows us to capture upward opportunities during significant volatility and avoids holding onto positions during downturns.

Let's keep in mind that trend-following strategies are based on the belief that once a market price establishes a trend, whether upward or downward, it tends to persist for some time. Therefore, traders should operate in the direction of this trend. However, in non-trending or volatile markets, these strategies might be less effective. Clearly, if this upcoming live stream causes significant price volatility, employing this strategy would be beneficial.

Additionally, some trend indicators can be adjusted based on individual preferences, such as:

Bollinger Bands (BOLL): Utilize the expansion and contraction of price channels to identify the strength of a trend and potential reversal points.

Relative Strength Index (RSI): While primarily used to measure overbought or oversold conditions, it can also help in assessing trend strength.

Bias (BIAS): Calculate the gap between the price and the moving average. An increasing positive bias might indicate a continuing upward trend, while an increasing negative bias could suggest a strengthening downward trend.

Another strategy is the option strategy. Here, users need to be reminded that "this strategy requires a sufficiently substantial capital base and should only use a minimal portion of their holdings."

Given that the current implied volatility of GME options is extremely high, buying options involves significant risks of volatility decay (therefore, it is recommended to complete short-term options trading within the same day to avoid the risk of price drop the next day, which could dampen market sentiment and accelerate volatility decay). As a result, many market veterans are adopting a "short volatility strategy," such as:

"Bond King" Bill Gross criticized this kind of "gambling-like" trading frenzy on social media, stating that he would not buy or sell these stocks, and that "Gamestonk" is outdated.

Gross explained that his strategy could be simply summarized as "shorting 400% annualized volatility," which involves a strategy called "selling straddles." The market has significantly overestimated the likelihood of substantial short-term price swings in stocks like GME and AMC.

The earnings from selling straddles come from the premiums received. If the price remains between the strike prices of the sold call and put options, the investor can keep the premiums and profit, such as:

If it is expected that the stock price will return to $30 per share in one week, one could sell a call option expiring in one week with a strike price of $70 per share, and sell a put option expiring in one week with a strike price of $20 per share. If the price rises or falls significantly beyond the strike prices of the sold options (above $70 per share + premium received, or below $20 per share + premium received), the investor will incur losses.

Therefore, users are advised to "precisely choose" the event nodes when market sentiment reaches its peak and sell wide straddles. For a safer strategy, one could buy an out-of-the-money call option to prevent being wiped out if the stock price surges significantly.

1. Trend-following strategy, which is more suitable for most people;

2. Shorting volatility, which is only suitable for investors with a very large capital base, using only a small portion of their capital for this strategy, and who are very familiar with options trading.