Red 32

I like gambling – always have. My high school was located across the street from Santa Anita Race Track in Arcadia, and my friends and I often went after school to bet on a race or two. On some Saturdays, we’d spend all afternoon at the track. In college, my friends and I traveled to Las Vegas or South Lake Tahoe to play blackjack, craps, or some other games. It was fun and exciting; however, I never risked more than I could afford to lose, which wasn’t much.

Since the start of COVID, investors have been gambling on stocks buying speculative names, or using options to leverage their bets. Options volume on the CBOE for calls has increased 247%. To add fuel to the fire, speculators have leveraged their accounts with margin. Since last March, margin debt has increased 63% to a record high of $778 billion!

The trading activity in speculative names and options has increased because of the Robinhood traders, Reddit, and WallStreetBets. John Marshall, head of derivatives research at Goldman Sachs, said, “For the largest online brokers, the number of daily trades has tripled since 2019. But this has mainly been driven by a small portion of their customer base. These day traders are less than 10% of their customers, but they represent more than half of their trades.”[1]

Sundial Growers (SNDL) is the latest example of this craze. After the social media crowd said to buy the stock, it jumped 144% in a few days, and volume spiked 730% as traders poured into it at the top before falling 32%. Dave Portnoy said on Twitter, “Back in $sndl cause I love the rush.” He added: “The $SNDL saga has convinced me you should have to pass an intelligence test to use Twitter.”

So far, GameStop is the poster child for speculation rocketing from $18 to $483 in two weeks before crashing. It’s now down 90% from the high, and the volume in the stock spiked 489% as speculators chased returns.

Here a few suggestions if you want to speculate.

  • Limit your speculative capital to 1% to 3% of your taxable investment account. Do not use retirement funds to buy penny stocks, call options, or meme stocks.
  • Do not use margin.
  • If you make a quick buck, take your gains and count your blessings.
  • If you’re losing money, cut your losses. Do not average down.
  • If a stock has risen 500% or more in a few days, wait for it to pull back before you decide to take the plunge. Stocks can’t remain vertical for long, and beware of parabolic charts.
  • Do your own research. Ignore your brother-in-law’s advice.
  • Only speculate with money you can afford to lose.
  • Beware of the wash rule.
  • If you suffer losses, you can write them off your taxes indefinitely until absorbed. The IRS allows you to write off $3,000 per year if you don’t have any capital gains. You can offset your losses dollar for dollar against any capital gains.
  • John Maynard Keynes said, “The market can remain irrational longer than you can remain solvent.”
  • You’re competing against Goldman Sachs, Morgan Stanley, American Funds, Dimensional Funds, BlackRock, Vanguard, Fidelity, Schwab, TD Ameritrade, Renaissance Technologies, and several thousand professional investors with deep pockets. Plan accordingly.

Happy trading and good luck.

“Gambling has brought our family together. We had to move to a smaller house.” ~ Tommy Cooper

February 12, 2021

Bill Parrott, CFP®, is the President and CEO of Parrott Wealth Management in Austin, Texas. Parrott Wealth Management is a fee-only, fiduciary, registered investment advisor firm. Our goal is to remove complexity, confusion, and worry from the investment and financial planning process so our clients can pursue a life of purpose. Our firm does not have an asset or fee minimum, and we work with anybody who needs financial help regardless of age, income, or asset level. PWM’s custodian is TD Ameritrade, and our annual fee starts at .5% of your assets and drops depending on the level of your assets.

Note: Investments are not guaranteed and do involve risk. Your returns may differ from those posted in this blog. PWM is not a tax advisor, nor do we give tax advice. Please consult your tax advisor for items that are specific to your situation. Options involve risk and aren’t suitable for every investor.


[1] https://markets.businessinsider.com/news/stocks/retail-reddit-robinhood-trading-boom-means-for-stocks-goldman-sachs-2021-2-1030051688, By Isabelle Lee, February 7, 2021