If you're thinking of riding the next meme stock mania, be sure to sell in about 2 weeks

Published Wed, Jun 9 20212:28 PM EDTUpdated Wed, Jun 9 20212:33 PM EDT

Key Points

On average, Reddit stocks' runs lasted nine trading days from the start to their first big drop during the initial frenzy in January, according to a CNBC analysis.
Durations varied and some experienced significant volatility even before finally cratering.
The trading mania made a resurgence this week as day traders on Reddit rotated from AMC Entertainment to Clover Health and Wendy's and to Clean Energy Fuels.
When a certain meme stock catches on and explodes in prices, institutional investors could use the volatility to their benefit by using more complex options strategies for outsized profits.

The meme-stock phenomenon, in which Reddit traders have been piling into one stock after another, shows no signs of slowing down. But even if the trend is here to stay, the length of each individual stock's run can be fleeting, a CNBC analysis of market data shows. On average, Reddit stocks' runs lasted nine trading days from the start to their first big drop during the initial frenzy in January, though durations varied and some experienced significant volatility even before finally cratering. The trading mania made a resurgence this week as day traders on Reddit's WallStreetBets forum rotated from AMC Entertainment to Clover Health and Wendy's on Tuesday, and to Clean Energy Fuels on Wednesday, many of which have elevated levels of short interest. But if recent history is any guide, most of these speculative runs could be short-lived. CNBC identified the starting point for five stocks popular on message boards earlier this year — GameStop , AMC, Bed Bath & Beyond, BlackBerry, and Koss Corp . — by finding the first time each stocks' single-day trading volume at least doubled its 30-day moving average of shares traded. That typically represents the point at which a flurry of new investors took interest in a stock that was not being heavily traded. Prior to the start of the original GameStop saga , for example, around 11 million shares of the stock were being traded each day on average. Then on Jan. 13, nearly 145 million GameStop shares traded hands and the share price surged 57%, the start of a run in which seven of the following nine days would see double-digit gains. GameStop finally took a steep dive of 44% on Jan. 28, an 11-day run in which the stock reached record highs. In the days following, the stock seesawed, falling by as much as 60% on its way back down. AMC Entertainment, which was on the brink of bankruptcy not long ago, enjoyed a 90% rally this month alone as the movie theater chain dethroned GameStop to become the meme king in the WallStreetBets chatroom. AMC's latest run (18 days and counting) is much longer than the January episode, which lasted for nine days. Investors might be encouraged by AMC's rapid action to raise cash as the company sold 20 million shares in two separate deals last week, generating around $800 million in capital. Still, the volatile name tumbled 10% on Wednesday. Institutional investors come into play Not only do Reddit traders pile into shares of these meme stocks, they have also been flocking to call option contracts. A call option is an instrument that gives an investor the right to buy a stock at a stated price within a particular time frame. Options volume exploded during the latest episode of the trading frenzy. Daily single stock options volume increased to more than $40 billion to $383 billion in the past week, according to data from Barclays. When a certain meme stock catches on and explodes in prices, institutional investors could use the volatility to their benefit by using more complex options strategies for outsized profits. The initial spike in options volume in these speculative names tends to target out-of-the-money calls, much higher than where the stock is trading, and that has a distorting effect on options prices that savvier retail, and certainly institutional traders then start to take advantage of, said CC Lagator, founder of trading platform Options AI . "Retail is distorting options prices. It's bad for those that come late and good for somebody who wants to take the other side of their trades," Lagator said. "A sophisticated trader, anyone from the professional side could be selling those overpriced options to them and buying underpriced options." In fact, many of these meme stocks including GameStop and AMC experienced a significant drop in retail trading as a percentage of total volume in the days ahead of the ultimate peak and subsequent decline, according to Goldman Sachs. "At some point, retail traders become a smaller percentage of overall volume and the tailwind inherent in this 'attention' signal fades," John Marshall, head of derivatives research at Goldman, said in a note. — CNBC's Michael Bloom contributed to this story. Enjoyed this article? For exclusive stock picks, investment ideas and CNBC global livestream Sign up for CNBC Pro Start your free trial now

Dado Ruvic | Reuters

On average, Reddit stocks' runs lasted nine trading days from the start to their first big drop during the initial frenzy in January, though durations varied and some experienced significant volatility even before finally cratering.