Buy Robinhood as Price Pulls Back 12% to $60?

Robinhood (HOOD), the US stock and crypto broker that debuted on the stock market last Thursday, has seen the value of its stock double.

The huge run-up in the price of the stock follows an inauspicious start to public life for the US trading app which has been at the centre of the trading boom among first-time retail investors  in the US. Robinhood charges 0% commission for

Robinhood (HOOD) share price 30m candles, 5 August 2021. Chart courtesy TradingView

From being at the centre of the meme stock craze around stocks such as Gamestop (GME) and AMC, it looks like Robinhood itself has joined the line-up of target stocks for the Reddit crowd that has fuelled the craze, in particular the WallStreetBets sub reddit.

Meme stocks are characterised by their volatility, with values often bearing no relation to stock fundamentals and instead driven largely by momentum trading among retail investors.

This appears to be what is happening with Robinhood stock. Cathie Wood’s ARK investment group bought the stock at IPO and will be sitting on sizeable gains.

Robinhood allocates large wedge to retail at IPO

The Robinhood IPO stood out from the crowd not just because of the brand power of its name but also the way it went about designing the IPO, with a very large 35% allocation to the retail market.

The management may have decided to go down that route as a sort of “thank you” to the small-time investors that have allowed the platform to expand so rapidly.

As it turns out the proportion of shares held by retail at close on the first day of trading was around 20-25%. The high proportion of retail investors trading its free float certainly help to explain its price volatility, with many more speculative traders joining in over the past couple of days.

Options trading behind volatility?

Yesterday was also the start of options trading in the stock, and this derivatives market can often lead to volatile trading in the underlying stock. A massive 329,000 options contracts were traded on Wednesday.

However, trading today has opened on a sour note for those who may have bought at what could turn out to be a near-term top for the stock. The stock is down 12% ($62.20) after news emerged of a filing by big institutional shareholder to sell 98 million shares.

Buy on this pullback?

But with Robinhood now firmly a member of the meme stock line-up, less risk-averse traders may want to enter their buy orders today as the price over the next few days heads for the next big round number – $100.

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