This is not investment advice. The author has no position in any of the stocks mentioned. Wccftech.com has a disclosure and ethics policy.
Who would have thought that Trump Media and Technology Group (NASDAQ: DJT), the entity that controls the Truth Social platform and makes barely any money, would manage to upstage the market's current belle - the multi-trillion-dollar AI play, NVIDIA? However, those banking on a reversion-to-the-mean type of move should stay their hands for now or risk getting burned.
For the benefit of those who might not be aware, Trump Media and Technology Group finally managed to close its long-delayed reverse merger with the SPAC Digital World last week, with the shares of the combined company debuting on the Nasdaq exchange on Tuesday.
Since then, however, the stock has exploded, adding billions of dollars to Donald Trump's net worth in the process, courtesy of his gigantic stake of 78.75 million shares in the company.
Trump Media and Technology Group vs. NVIDIA
As is patently visible in the above chart, Trump Media and Technology Group shares are vastly outperforming NVIDIA's at the moment, with the former having registered year-to-date gains of 280 percent vs. just around 90 percent for the latter.
This is all the more striking given the fact that Trump Media and Technology Group recorded revenue of just $2.30 million in the past twelve months, corresponding to a Trailing Twelve Months (TTM) Price-to-Sales (P/S) ratio of 3,765.22, based on the current market capitalization of $8.66 billion. For comparison, NVIDIA currently has a TTM P/S ratio of just 37.04.
Don't Bet on an Imminent End to This Irrationality
It is said that the market can remain irrational far longer than an investor can remain solvent. This adage appears doubly true for Trump Media and Technology Group.
On the surface, it appears a no-brainer, sure-shot move to buy put options on the effervescent stock. After all, the company's warrants are expected to exit their lock-up period in around a month, setting the stage for accelerated profit-taking and dilution. Then, in around six months, the vast majority of insider shares, including Trump's gigantic stake, will exit lock-up restrictions, heralding fierce headwinds in the process. However, this is a stock that is trading on Trump's star power and political gambits as opposed to established financial principles. Translation: the ongoing hype gravy train can last a lot longer.
What's more, even from a financial standpoint, it does not make sense to buy puts at this stage, given the astronomically elevated implied volatility around Trump Media and Technology Group options. The above snippet details the current implied volatility (IV) of 25-delta puts vs. calls. As a general rule, the higher the demand for particular options, the higher their implied volatility. Additionally, 25-delta options roughly have a 25 percent probability of expiring in the money. As is evident from the above snippet, Trump Media and Technology Group put options currently have higher implied volatility as compared to calls, which means they are much more expensive.
Given these dynamics, the risk-reward payoff is not very attractive for buying puts at the moment, as discussed in detail in this Reddit thread. So, the show is likely to continue for the time being.
