Robinhood and the Meme Craze
Robinhood (NASDAQ: HOOD) the brokerage platform most known for its involvement in meme stocks, has become one on its own. Heavy retail attention from users of Robinhood has led to the rallies of some significant names (coined meme stocks) like GameStop, AMC, and now the platform itself.
Following shortly after the Robinhood IPO, the stock tumbled and it is seen as yet another failure of a public offering. However, it didn’t just end here, the stock began surging.
This sudden surge and the history behind the Robinhood platform sent the stock flying, making itself a part of its creation, the meme stocks.
Regardless of the rallies, some investors are begging the question, is Robinhood a good long-term stock?
Well, let’s find out.
A Long-Term Outlook
While Robinhood has seen its fair share of popularity (considering the meme craze) and volatility in the short term, here are some things to note and pay attention to over the long term.
As of March this year, Robinhood’s platform has grown to over 17.7 million monthly active users consistently trading and investing. This amounts to over $81 billion in assets under custody. This user growth could have been heavily influenced by meme stock rallies. Although, what matters is retaining those users so they can stay within the ecosystem.
A major reason why Robinhood’s platform is so popular is because of the zero-commission trading, fractional shares, and the extremely user-friendly interface. All of these features combined create the most beginner-friendly investing ecosystem. This platform has been built for the new generations just beginning to become familiar with the financial world. It’s been traditionally too complex for many to begin their investing journeys.
All of these characteristics make Robinhood very appealing to many investors as a potential long-term investment. Although, it’s not all sunshine and rainbows, here are some concerns to be aware of.
Currently, the valuation is quite high after the heavy meme stock rallies, which pushed the stock far above feasible fundamental share value, as well as taking into consideration Robinhood has faced scrutiny in the past, which may cause further volatility heading forward.
Robinhood’s Recent Acquisition
Say Technologies, the firm which makes retail investors’ questions become answered at many earnings calls from various companies, is being acquired by Robinhood for $140 million in an all-cash deal.
This is after recognizing that both Say Technologies and Robinhood hold the same core values of providing the average retail investor with access to financial market tools and opportunities that would regularly be more accessible to financial institutions. This will greatly benefit the users on Robinhood who want to exercise their shareholder rights as they can now submit questions to ask the management teams.
Acquiring Say Technologies is a very smart move, even more so when you account for the platform integration. This will eliminate and barriers to entry for all users investing throughout the Robinhood ecosystem. In addition, this new integrated feature may attract more shareholders and investors to invest through Robinhood’s platform. This will be added to the growing list of features such as zero-commission trades, fractional shares, etc.
What Can We Expect Going Forward?
So, what can we take away from all of this?
For starters, it’s important to recognize how far Robinhood has come. Management has also taken the right actions to continuously improve the democratized financial ecosystem for its users, which is shown with the acquisition of Say Technologies. These continued efforts in the improvement of the overall ecosystem are what keeps users coming back, as well as new users over the long term. This is what will set them apart from the other meme stocks that seen significant price upside.
Overall, Robinhood is becoming one of the financial leaders of the world as they captivate younger generations’ attention, influencing the beginning of their investing journey with industry-leading features, visually appealing user interfaces, and abilities to exercise shareholder rights. Meme stock or not, Robinhood has shook the financial trading world and opened the doors to opportunity to many!
Robinhood has definitely changed the way we operate in financial markets. The platform has plenty of room for growth and improvement. Is just funny how the platform that had a major influence in the meme stock craze…becomes a meme its self. If you are bullish on this stock you can gain exposure to this stock with limited risk by using a Put Calendar spread over the next 30 days or so hoping to profit from the expiration of the short leg of this strategy without having too much price decay on your long leg of this strategy.
This is not intended to be investment advice. As always do your own due diligence and invest based upon your own risk appetite and consult your own financial advisor for the right investment strategy for your specific needs.
Lets take a look at the option chain. As of this writing Robinhood currently trades $45 per share. For a put calendar spread we need to sell a put for one expiration date then buy a put for with the same strike price for the next expiration cycle. You can sell the Sept. 17th expiration at the $40 strike price and collect about $205 in premium. Then buy the Oct. 15th expiration at $40 strike price a pay a premium of $340. This will yield a net cost of approximately $135 to initiate this strategy.
Now lets discuss the potential outcomes/risk. First let us note that this a limited risk/limited reward position. Our risk is limited to the amount we paid to enter the trade. In theory we can never lose more than that. Now price can either go up, up a lot, sideways, down, or down a lot. Let us also note that level of profitability if any, is greatly dependent on the decay of your long option contracts (the one we bought).
Lets see how this affects our outcome. If price goes up a lot by expiration our short option (the one we sold) will expire worthless and our long term option will have lost value as well but depending on how much the option decayed you may still be able to close out your long option (the one we bought) and may have a minor gain or loss.
If price goes up a bit but remains higher than $40 then the short option expires worthless and you keep the premium and can close out the long option and realize a net profit. If price goes sideways and still stays above $40 at expiration then the short option expires worthless and you can close out the long option and realize a net profit. If price goes down a little but still stays above $40 then the short option will expire worthless and you can close out the long option and realize a net profit.
If price goes down a lot below $40 then you will have to buy $100 shares at the strike price of $40 and own 100 shares. However we still have the put option that we bought which means we can exercise the option and sell those shares at $40 regardless of where they are priced at below $40. This will result in us realizing a net loss equivalent to the premium we paid to enter the trade.
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