Last week we discussed the seemingly unstoppable resurgence of Reddit forum WallStreetBets’ favorite stocks GameStop and AMC.
While those moves continue to burn short-sellers and transfer wealth to the retail army, on Tuesday a new name entered the arena: Wendy’s (NYSE: WEN).
Recent murmurs of “chicken tendies,” undervaluation, and echoes of support from certain pundits on the street have brought Wendy’s into Reddit’s good graces.
The fast-food behemoth has seemingly joined the forum chatter just within the last few days, allowing for a face-ripping gamma squeeze to take place in WEN’s options chain on Tuesday.
Let’s take a brief look at WEN, examine the options trading around it, and decide if there’s still room for the stock to run further.
Wendy’s “Chicken Tendies” Lure Retail Traders
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The newest addition to the ranks of the Reddit army comes in a familiar package.
Every American is familiar with Wendy’s, the ubiquitous fast-food chain founded by congenial spokesperson/grandpa Dave Thomas.
But on Tuesday, the company experienced a windfall of retail investment, based apparently on a comically bullish post in Reddit’s WallStreetBets forum.
The topic was posted by a user named u/Chillznday, who makes the case that Wendy’s is “literally the perfect stock for this sub, let me explain.”
He then elaborated: [sic] “First, they just came out with their new summer salad. Experts are already stating that this salad is the salad of the summer…Second, Wendys social media profile is no stranger to memes…this will only increase with fellow autists supporting it…Third, Both Gamestop and Wendys have been sharing in this Social Media “Beef” or “Metapragmatic Roasting” of each other…Forth, well this one is obvious but Wendys Chicken Tendies. Literally the perfect stock for this sub.”
As skeptical as you may be about “salad experts” insight into risk assets, it’s a fool’s errand to ignore this sort of comment on Reddit.
In the current paradigm of retail trader power moves, being in touch with Reddit’s sentiments can potentially make traders a ton of money.
After all, this was the most upvoted post on WSB related to Wendy’s on Tuesday, sending the stock soaring nearly 19 percent at the time of writing.
To add fuel to the fire Tuesday morning, Jim Cramer tweeted:
Wendy's ($WEN) a huge favorite of @MadMoneyOnCNBC gets nice push from Reddit. I think it deserves to be higher.
— Jim Cramer (@jimcramer) June 8, 2021
WEN Call Options Boost 39x Overnight
But as you probably know by now, Reddit traders’ bread and butter lie not in the 19-point move in common shares, but in WEN’s options chain.
Specifically, they like to buy as many out-of-the-money call options as they can, forcing market makers to purchase shares of the underlying stock as collateral.
This is called a gamma squeeze. It’s exactly what caused the violent moves in GameStop earlier this year, and today we’re seeing the phenomenon spread into a multitude of retail’s favorite stocks.
These are some of the juiciest gains in the entire stock market…
But to fully understand this mechanic, you first need to have a basic understanding of implied volatility (IV).
IV is an estimate of future volatility, in other words, the baked-in odds that market makers use to predict future stock moves.
If a stock is averaging 30-point moves every day for a week, the IV will be elevated, making it more expensive to buy calls or puts (and less risky for market makers to sell the options.)
It’s like a sports bet. The odds that the stock will move in any given direction are higher, so the cost to make the trade is higher as well.
Because WEN hasn’t been a historically volatile stock, at market close on Monday, WEN options were averaging between 29-34 percent IV.
This is very low. To draw a comparison, AMC’s weekly options currently have IVs between 350-400 percent.
Let’s look at a specific example in WEN … it’s a doozy.
At Monday’s close, the July 16 $30 calls were trading for $0.01.
By market open on Tuesday, they were trading for $0.87.
Five minutes later at 9:35 a.m. Eastern, they were trading for $2.61.
By 11 a.m. Eastern, they were trading at $3.91, representing an increase of 39,000 percent overnight!
Is it Too Late to Trade WEN?
When weighing the possibility of trading WEN at these levels, you need to be very careful.
On one hand, this is the very first day of the move — and if recent history tells us anything, Reddit’s squeezes usually have more than one day of gains in them.
On the other hand, this idea has come out of nowhere, seemingly birthed on Reddit over the past few days. Keep in mind that AMC and GameStop were discussed for months before blasting off.
No matter what you do: Stay disciplined, stick to your trading rules, and don’t let FOMO get the best of you.
Featured cover editorial credit: Marcus Krauss / Shutterstock.com