Thanks to the resurgence of the meme trading phenomenon, Robinhood (NASDAQ:HOOD) – which provides a gamified investing platform geared for retail investors – enjoyed a significant shot in the arm. However, the hoopla surrounding the frenzy overlooks the robust fundamentals that make HOOD stock compelling.
Let’s get the obvious catalyst out of the way. On Sunday, Keith Gill – who goes by the online moniker Roaring Kitty – shared a series of social media posts for the first time in three years. Investors quickly interpreted this as his official return to spearhead a new rally. Subsequently, a number of original meme stocks skyrocketed when the market opened on Monday.
However, it wasn’t just the memes that enjoyed a robust swing higher. Ideas that are popular with retail investors – such as HOOD stock – also benefited. With Robinhood’s trading app enabling regular folks quarantined during the worst of the Covid-19 outbreak easy access to the equities and cryptocurrency markets, it’s no shock to see HOOD march northward.
Still, it’s important to note that Robinhood is more than just a meme beneficiary.
Enticing Fundamentals Support Robinhood’s Upside Narrative
First, multiple reports indicate that soaring inflation and a crypto winter haven’t permanently dented individual interest in investing. If anything, people are more eager to participate in the capital markets. That’s good for HOOD stock.
Another element that favors Robinhood’s core business is artificial intelligence. With advanced chatbots like ChatGPT, investors can acquire ideas from AI. More importantly, they can ask questions, thus bolstering their know-how through hands-on experience. This too should benefit HOOD stock.
And powerfully, retail investors are taking on a relatively high-risk profile when they participate in the markets. That’s largely due to a range of personal and sociological factors. At the same time, there’s a brewing sense of financial fatalism. In other words, people nowadays need to take big risks in order to have a chance of reaching the American Dream.
That can be a dangerous sentiment if left unchecked. However, it’s also a major catalyst for Robinhood stock.
Trade of the Day: Buy HOOD Stock Call Options
With the combination of the meme trade and the fundamentals in mind, it’s possible that HOOD stock can continue to rise. For the trade of the day, I’m looking at Robinhood call options, specifically the 20 Sept. 2024 $20 call.
First, what makes this derivative attractive is the relatively high demand. On Tuesday, volume soared to 1,136 contracts, while open interest stood at 5,444 contracts. Further, the implied volatility of this contract was 63.81%, which is a relatively modest premium to HOOD’s historical volatility of 51.25%. With the modest gap between the two metrics, there may be an incentive to buy the contract rather than to sell it.
Second, the high volume of the $20 call relative to the $19 call (which saw volume of only 313 contracts) with the same expiration date may be due to the psychological tendency of humans to prefer whole, round numbers.
One final note of caution: Robinhood stock features a 60-month beta of 1.74x, which is much more volatile than the benchmark index. Therefore, if you secure a nice profit, you may want to consider booking it and moving on.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
