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The GameStop trade remains frothy and risky as retail investors flock back to meme stocks

Retail investor favorite Keith Gill is back, and so is the meme frenzy.

GameStop (GME) shares surged Monday after Gill, also known as “Roaring Kitty,” posted a screenshot on Reddit showing he built a sizable position in the video game retailer.

And that was enough to ignite the retail trading army. Share prices more than doubled in premarket action before paring gains throughout the day, finishing up 21%.

But investors should think twice before getting caught up in the meme frenzy. Wall Street pros caution that it’s a risky move, and big losses are a real threat.

“The potential to lose money is significant ... And a lot of investors have lost pretty consistently along the way,” RapidRatings CEO James Gellert told me on Catalysts.

A screen displays GameStop stock trading information on the floor at the New York Stock Exchange (NYSE) in New York City, U.S., June 3, 2024.  REUTERS/Brendan McDermid
A screen displays GameStop stock trading information on the floor at the New York Stock Exchange (NYSE) in New York City, June 3, 2024. (REUTERS/Brendan McDermid) (REUTERS / Reuters)

The post thought to be linked to Gill’s Reddit account showed holdings of 5 million GameStop shares, worth nearly $116 million as of Friday’s close. The screenshot also included 120,000 options contracts set to expire June 21 with a strike price of $20 each. The options, which were worth $65.7 million as of Friday’s close, soared in value during Monday’s rally.

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“The options position … is a relatively short-term contract, so it needs to have momentum in order to be in the money, which is undoubtedly a reason why someone would want to inject more momentum,” Gellert added.

Interactive Brokers chief markets strategist Steve Sosnick also warned of potential losses Monday morning, adding that for the broader markets it’s a “sign of froth” and exuberance.

“If you're chasing this stock up here, you're more likely than not the source of liquidity for whoever's controlling this account to sell into your enthusiasm. They're stoking the enthusiasm to get ordinary people to buy,” Sosnick cautioned.

Monday’s gains followed a short-lived 179% two-day run-up in the stock last month, sparked by Gill’s return to social media for the first time since 2021.

Despite the renewed hype and excitement surrounding the video game company in recent weeks, analysts are quick to reiterate GameStop's massive moves remain disconnected from fundamentals. The company's preliminary first quarter results showed expected sales between $872 million and $892 million, a decline from $1.24 billion the prior year.

“I’m not seeing anything that tells me that the business is turning around,” Wedbush’s Michael Pachter told me last month. “I feel sorry for the fools who buy the stock … it's worth single digits [in share price].”

Does volatility in GameStop discourage the next generation of investors? Noted value investor Jonathan Boyar weighs in on an episode of Yahoo Finance's "Opening Bid" podcast. Listen in below.

Seana Smith is an anchor at Yahoo Finance. Follow Smith on Twitter @SeanaNSmith. Tips on deals, mergers, activist situations, or anything else? Email seanasmith@yahooinc.com.

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