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Reddit Stock Surges: Is Investor Appetite for Loss-Making Companies Returning?

Published 03/25/2024, 11:58 AM
Updated 03/25/2024, 01:35 PM
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With Reddit options able to be traded from today, it has sparked discussions about the potential resurgence of investor appetite for loss-making companies. So far this year, we have seen a trend of retail investors showing a slightly increased interest in high-risk, high-reward investments once again.

With Reddit options now available to trade, a closer examination of the factors driving the potential renewed interest in companies with a history of losses is beginning to take place.

Reddit Stock Options Now Available

The Reddit IPO brought about some excitement for traders, and now, with RDDT options being traded, it has introduced a new dynamic to the Reddit stock story. According to Bloomberg Reddit’s option volume topped 8,000 contracts within 45 minutes of trading, “led by a put protecting against a near 50% slide in shares within a month.”

Furthermore, Bloomberg said that by 10:15 a.m. in New York, around 1.5 puts had traded for every call, with the volume led by small contracts.

That volume aligns with what many were seeing on the popular WallStreetBets subreddit, where many had said they aimed to short the stock by buying put options.

Speaking to Investing.com, Garrett DeSimone, the head quant at OptionMetrics, said: “Given the hype surrounding the RDDT IPO last week, I expect there will be significant activity in these options.”

DeSimone also stated that the Reddit options are likely going to be expensive from a premium standpoint, “which is typical with hot-name IPOs.”

“Additionally, I anticipate puts to fetch more exorbitant prices compared to calls at the same strike,” he added. “This is due to the fact that short sales are extremely difficult, if not impossible, during the 60-day lockout period.”

Reddit Stock Price Today

Despite the sentiment, Reddit shares are up more than 9% Monday, climbing back above $50 per share after a more than 8% decline during Friday’s session, which saw it close at $46 per share.

As of 13:35 PM ET, Reddit shares are up 18.25% at $54.39. Reddit set its IPO price at $34 per share late on Wednesday last week, the top end of its range.

Nathan Viehl, Partner Corporate Finance & Securities at Thompson Coburn, told Investing.com that Reddit’s "successful first day of trading and the sustained momentum into Monday are a breath of fresh air for the software and technology investment community."

Why Invest in Loss-Making Companies?

Traders may invest in loss-making companies for various reasons, despite the inherent risks. They might see potential for high returns, anticipating that a struggling company could turn around its performance, leading to substantial gains if it becomes profitable.

Additionally, influences from social media platforms and the potential for short squeezes can generate momentum for stocks of loss-making companies, as seen with the "meme stock" phenomenon. Some traders also adopt a contrarian approach, seeking to buy shares of out-of-favor companies in anticipation of a price rebound.

"After two years of tightening valuations and even some wholesale questioning of the venture capital funding model, if Reddit’s share price can sustain this momentum, look for the IPO queue to open up," Viehl added.

How to Invest in Reddit

Of course, investors can now buy Reddit options. However, investing in Reddit shares involves a series of steps that encompass setting up an investment account, conducting research, deciding on the investment amount, and placing the order.

Firstly, open an investment account, also known as a brokerage account with a regulated broker. This is where your investments and the funds used for purchasing investments are held. There are various types of investment accounts, such as Roth IRAs or standard brokerage accounts, each offering different benefits.

Before purchasing Reddit shares, it's crucial to research the company's fundamentals and understand the risks.

Next, you will need to consider how much to invest in Reddit shares, remembering to assess your comfort level and ensure that the investment aligns with your overall portfolio balance.

The final step is to place your order on the brokerage platform. The type of order you select and the parameters you set are important considerations at this stage.

Learn more about ‘Reddit Stocks Investing’

In recent years, Reddit unquestionably changed the face of individual investing. It propelled stocks not only to higher prices, but into the broader consciousness.

The platform may be about to have its own IPO, but the ‘Reddit Investing’ channel also remains a fascinating resource for investors — and a valuable tool, when used properly. Learn more about how to find trending stocks on Reddit.

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