Jim Cramer: Don’t Let Robinhood’s Rise Put You in Jeopardy

David Faber checked me in the act this morning. Perhaps because I am so excited about my partner being host of “Jeopardy” all week, I found myself taking part in an even-more-than-usual upbeat show.

So when Robinhood’s (HOOD) stock was halted for volatility — too many buyers not enough sellers — I was gleeful about the double from where it was offered just a week ago.

He cut me to the quick, asking if I am so excited as to lose caution and give the wrong impression of the situation. My other partner, Carl Quintanella, quickly reminded me of my last book, “Get Rich Carefully,” and how Robinhood’s stock would seem to be the opposite.

So, immediately after the advice of both my colleagues, I realized that I was encouraging throwing caution to the wind and that’s not me. It might have been me at the old hedge fund where I was often wildly concentrated, but it sure isn’t me now.

I suggested that people not be piggish. Many Robinhoodies got stock on the deal and I urged them to sell something, maybe as much as a half of the position, because then you could play with the house’s money, the most enviable position to be in when you own a stock.

Or, I said, at least take something off the table, perhaps as much needed to purchase the fabled cashmere sweater, fabled because when my mother gambled and won, she would leave the casino or the racetrack with her winnings in tact and not give them back.

Needless to say, the forum we have is huge and the stock quickly backtracked 20 points. That’s OK, too, especially if you bought more when the stock broke the print as I advised you heartily to do so on Monday.

Why do I like the stock of Robinhood so much? Because people keep counting out CEO Vlad Tenev. They think that he is just a tech guy with a solid app. He’s really an apostle of saving money and it’s something that the 22 million people who have opened an account with Robinhood — many after the GameStop (GME) debacle, when restrictions were put on selling because he didn’t have the correct controls on. The revolutionaries had no time for negativity. They love the ease of the app and they love free commissions and that’s all they need to know.

I took a lot of heat last week when I kept urging people to buy the stock and suggested that it could become a “meme” favorite, a short-hand term for a loved-beyond-traditional-reason stock where money can be made by just buying and buying and buying. A meme stock is often one where there is a huge short position and the goal is not only to make money, but to make money busting the short. It appears that even as an unseasoned stock, this one had already attracted a considerable short position, so it was game on for the memesters.

What do you do if you own a meme stock? First, you can bask in it, because it’s easy money. But then you need to ring the register on some of your position, because you must be never let your conviction crunch your discipline. That’s the case no matter what the stock.

This is why we peeled off some of Cramer-favorite Advanced Micro Devices  (AMD)  this week when it officially became a meme stock. What happened here? AMD is trying to buy Xilinx (XLNX) , with stock. The deal is supposed to close soon.

If you are an arbitrageur, you might be selling AMD’s stock and buying the stock of Xilinx one-for-one to “create” the deal at closing, because it will flatten the trade. Xilinx’s stock should inch up while the deal closes and you will have locked in a new gain on one or both stocks.

But there is a problem. Many arbitrageurs don’t like to buy high-dollar value stocks like the $140 priced Xilinx, because if the deal breaks down, they will be crushed. So they are selling Xilinx and buying back AMD. The meme people love crushing the hedge funds with their buying as they get a twofer-higher price and beaten hedge funds. I just hope that they don’t forget to buy that cashmere sweater.

(AMD is a holding in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells this stock? Learn more now.)

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