The AI bubble hasn't even started yet

Hello friends.

We think that AI is the next big bubble, and we expect this bubble to expand into the euphoria phase through the rest of this year even as the rest of the stock market is flat to down and big names start to topple over. We think the best play for this bubble is the ticker AI since retail traders seem to love trading this ticker, which implies that it will be more volatile than the other AI names.

The inspiration for my idea came (as it often does) while looking through some Wallstreetbets ideas for a monkey to fade. I saw not one, but several WSB traders who had purchased put options on AI and were posting their unrealized gains following the recent crash. This was very interesting because usually, you would expect that for a bubble like this to form, the apes would surely be long on this stock, and not buying puts or shorting. That really was not the case though. There is widespread criticism and skepticism of the AI stock bubble, and there are not many traders who are hopping on board with the trend. Fear is even being spread for this particular ticker AI in the form of reports that the company has fabricated 'misleading accounting reports'. The reaction to this "breaking news" was a sharp drop, which means that many of the panic-prone retail paper hand longs have already been killed and will no longer be around to hammer the bid, a good sign for the longs. Further evidence that traders are skeptical of this bubble comes in the form of the short interest, which is rather high at 27.5%. How can such skepticism and fear be commonplace during the peak stage of a bubble, which usually requires extreme euphoria?

In terms of price and time structure, this bubble does not look like a typical complete bubble. It looks like the early phase to me. This is because, rather than seeing one massive and jarring jolt to the upside that cleans out most shorts and gets most retail traders to panic buy, we have seen a relatively slow and methodical grind upwards which has included several retracements. For us, this is a sign of a healthy meme stock bubble. Here is an example of the opposite kind of bubble, on Buzzfeed stock. As you can see, it goes STRAIGHT up, which signals that euphoria has set in and the bubble is about to burst. The trade here would be to wait for the crash to begin and then short with a stop above the high and hold onto the short for the long ride down, which would have been successful.



Now, the AI ticker probably isn't a good investment. We think of it as a 'meme' stock. So of course you do not want to be holding the bag at the end of the game, which requires some risk management and means you can't average down forever. Make no mistake, this will end in tears. AI will probably trade for pennies or even be bankrupt in a few years if it follows the same path that other meme stocks have. The company is growing rapidly, but it's also burning through cash and diluting shareholders to fund that burn. We think this stock is a great play for the coming months, and we expect there to be a 'sudden massive spike' where call options print really well. Despite that, we do not want to buy calls, because the implied volatility is absurdly high which makes buying options less attractive to us. Instead, our plan is to be selling puts over the course of the next month. As we sell these puts, we will harvest a hefty premium as well as get the chance to buy some of these juicy shares at a discount. If we end up being assigned, we will sell calls to the apes and hope our shares get called away during a big spike. We highly suspect that the price will decide to sweep through these local lows and tap into the 19-handle. If this happens, we will sell a lot of puts there and build out our position. In terms of our risk management strategy, we would want to get the hell out of this name if the momentum really starts to fade on the higher time frames and not just in a short-term panic kind of way. This way, there is no potential for us to hold this stock to zero.