Note: Although this article involves former President Donald Trump’s social media company, please understand that this is neither an endorsement nor criticism of Trump, his politics, or his business policies. This article describes a potentially lucrative short-term trade, without being a bet for or against Trump.

Background

Last week Trump Media & Technology Group (TMTG), the parent company of Donald Trump’s social media platform Truth Social, was listed on the Nasdaq stock exchange following a merger with Digital World Acquisition Corp., a publicly traded shell company. This type of transaction is often referred to as a SPAC (Special Purpose Acquisition Company) merger.

The merger allowed TMTG to bypass the traditional initial public offering (IPO) process, which can be lengthy and complex. Instead, the shell company (Digital World Acquisition Corp.) that was already publicly traded on the Nasdaq acquired TMTG, and TMTG took its place on the stock exchange.

As a result of the merger, Trump Media & Technology Group began trading under the new ticker symbol “DJT” on the Nasdaq. When I got up last Tuesday morning (the first day DJT traded on exchange), I turned on CNBC as always while going through my morning routine. The top story was that DJT shares were up 40%.

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Whenever a company makes a huge intraday move, it gets my attention because that means the option premiums are probably soaring. The action here had all the hallmarks of a meme stock, which refers to the shares of a company that have gained viral popularity due to heightened social sentiment.

GameStop (NYSE: GME) is widely regarded as the first meme stock, whose price rose as much as 100 times over several months as its meme community crafted a short squeeze. These stocks carry an added risk of higher-than-normal volatility that could be driven by viral posts on various social media platforms. Yet, there can also be a high profit potential due to the volatility, as I described in this 2021 article on cashing in on GME’s volatility.

Might this be another opportunity to do the same?

A Brief Refresher on Cash-Covered Puts

I view rapid stock moves as opportunities to sell far out-of-the money puts to generate superior returns.

An investor who sells a put is selling a potential obligation to buy shares (in 100 increment lots per contract) at a defined price at which the trade would be executed (the strike price) and a defined date by which the trade would occur (the expiration date).

The person buying the put is either betting the price will go down, or they are buying insurance against shares they own just in case the price collapses. For example, someone who owns shares in a company trading at $150 a share might buy a put with a strike price of $120 to ensure they can still sell their shares at least at that price. It’s like buying an insurance premium against larger losses.

The person selling the put is like the insurance broker, but they are creating the potential obligation to buy shares. If you sold the $120 put to the person above, and at expiration shares were trading at $80, then you still have to pay them $120 for their shares. That’s the risk involved, but you are being paid for taking that risk.

The Trade

Let me note that this is a risky trade for several reasons. I only devote a small portion of my portfolio — less than 5% — to such risky trades. Things could go wrong, which I will detail below.

When I saw the huge movement in the DJT share price, I immediately checked the stock options. I was interested in a fast profit on a short-term contract.

The June 21 contract — 87 days from the time I was reviewing this trade — caught my eye. The key to these meme trades is finding a high option premium for shares that are far out-of-the money.

In this case, with shares trading at $62.35, the June 21 put with a strike price of $12.50 was trading at $1.60 per share. That means that if I accepted the potential for assignment of these shares at $12.50 within 87 days, I would be paid a premium of $1.60. My net cost if assigned would only be ($12.50 – $1.60) = $10.90, thus my potential return would be 14.7% ($1.60 on $10.90 risked). That is a potential annualized return of 61.5%.

Shares will have to fall below $12.50 before I would be at risk of assignment. The only way I will be assigned at a net loss is for shares to fall below the $10.90 I risked. That would reflect a decline of 82.5% from the share price when I made the trade. If shares go up from here, I win. Even if they fall 80%, I win.

I will write an article updating this trade — win or lose — when it is closed.

The Risks

By any financial measure, the shares are grossly overvalued. It may be worth very little in the long run. It is just too early to tell. This trade is simply a bet that shares won’t plunge by more than 80% in 87 days.

It’s important to note that TMTG has yet to disclose Truth Social’s user numbers. Also, the company is highly dependent on the presence of Donald Trump. He is a controversial figure, but very popular with his followers. If the former president were to limit or discontinue his relationship with the company for any reason, the company could be significantly disadvantaged.

Trump is going to maintain roughly a 60% stake in this company. And, per the terms of this merger, there is a six-month lockup period, unless a special exception is approved by the board.

This is why I selected the June contract. If Trump cashes out, shares could see heavy downward pressure. And the board could approve of him selling some shares before the lockup period. But with a short-term trade, I am trying to limit the chance of a Trump exodus tanking shares.

Also, it’s important to note that when you sell a put, you need to have the cash in your account to cover it if it is assigned. In this case, assignment of each contract would set me back $12.50 * 100 shares = $1,250.

Conclusions

In closing, I want to note that I am writing this article on 3/26/24, a week ahead of its publication date. Shares may have settled down significantly by the time you read this. The opportunity could be gone. However, the key lesson here is that these opportunities regularly arise. Whenever you see a share price skyrocketing, it’s always a good idea to check those option premiums.

This trade is very similar to the GameStop trade. I sold a far out-of-the money put that have would require shares to fall by 95% before I lost money on the trade. Shares did fall, but I closed the trade early for most of the potential profit.

Finally, let me state that if you have an aversion to investing with Trump, that’s not what you are doing. You are making a bet that shares won’t fall more than 82.5%. But you can always immediately sell your shares at a loss and exit the position if you are assigned.

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