Meme-Stock Doubters Eye Hedge-Fund Strategy to Bet on Reversal

3hwkymc3rnsb3m1ed9rp02[d_media_dl_1.jpg Source: Barclays Plc

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(Bloomberg) — Barclays Plc says that it’s about time to pump the brakes on a meme stock craze that’s driven sharp rallies in companies like Kohl’s Corp. and Opendoor Technologies Inc.

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Retail traders have been piling into these unlikely names and sending their shares soaring, showing a kind of fervor that harkens back to the mania around GameStop Corp. shares during the Covid-19 pandemic. 

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But these stocks can fall as suddenly as they rise, which is why Stefano Pascale at Barclays says one potential tactic is a popular hedge-fund strategy known as the dispersion trade. It involves a combination of options in single stocks and contracts on a broad index like the S&P 500 Index.

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In this case, investors could use options to bet that a basket of meme stocks will continue to be far more volatile than the S&P 500. For traders wanting to take a more directional bet on the frothiest companies, they can buy puts that would benefit if these shares reverse course.

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“There are certain corners of the market where it does feel very bubbly,” said Pascale, head of US equity derivatives strategy at Barclays.

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He and his colleague Anshul Gupta have been warning about untethered market exuberance since the start of July. They point to a rush of companies going public by merging with blank-check companies, as well as the rally in Cathie Wood’s ARK Innovation ETF. The fund is bullish on a swath of tech stocks and is up 73% in the last three months.

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These are “signs that we typically associate with a frothy market,” they wrote in July 1 note.

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Social media buzz has spurred an outsized rally in retailer Kohl’s, which rose as much as 105% on Tuesday. Shares of Opendoor, a platform for buying and selling real estate, are up more than 440% since the start of the month.

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Mounting Euphoria

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Last week, the Barclays Equity Euphoria Indicator, which uses options data to quantify investors’ giddiness, jumped to its highest level since late December.

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“A lot of people may recognize that there is a bubble and they may recognize that in the end, they will have to unwind in some form or another,” Pascale said.

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The challenge facing traders is how to pick the losers. 

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In a Monday note, Piper Sandler Cos. identified two stocks up significantly this year that could be dispersion-trade candidates. It’s bearish on beverage maker Celsius Holdings Inc., which is up 68% in 2025 and trades at a lofty price-to-earnings ratio of 77.6. Another is NRG Energy Inc., up 71% this year.

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“To me, the activity is starting to have much more of a 2021 feel to it,” said Interactive Brokers’ chief strategist Steve Sosnick, referring to the peak of the GameStop frenzy.