AMC: A chance to play the options

J. Michael Jones

Thesis

Along with GameStop Corp. (GME) and Bed Bath & Beyond Inc. (BBBY), AMC Entertainment Holdings, Inc. (NYSE: AMC) is one of WallStreetBets’ (“WSB”) favorite stocks. Accordingly, AMC’s stock performance has closely followed the sentiment of the WSB YTD and after the strong rise in BBBY, AMC rose more than 100% in the last few weeks. But after the Ryan Cohan disappointment, AMC stock has fallen again and is now trading roughly -30% YTD, versus a loss of less than 12% for the S&P 500 (SPY).

In this article, I would like to present what I believe could be a hugely profitable opportunity, based on an AMC options strategy: taking advantage of rich implied volatility, which is currently in the 98th percentile over the past 52 weeks.

Options trading

Along with the stock move, the implied volatility of AMC options has exploded and is now trading in the top 5th percentile for almost all strikes and durations. I think this opens up a huge opportunity for the options trader to “harvest” volatility by writing an ATM (at the money).

For reference, if an investor were to short the $18 strike with the September 30 expiration (less than 40% days to expiration), that trade would yield a premium of $4, which is more than 20% of the notional The trade would become a new contract with the same conditions; the annualized return would be close to 515%.

Short selling is a trading strategy where an investor sells both an ATM call option and an ATM put option. Thus, the investor is basically betting that, at expiration, the stock will trade close to the strike. The margin of safety is given by the premium charged by the investor. And accordingly, the breakeven points for the strategy referenced above would be +/-20% OTM (out of the money).

If AMC stock traded between the yellow borders, as highlighted below, investors would make money.

IBKR;  AMC Stock Performance

IBKR; AMC Stock Performance

Why Delta-Neutral makes sense

It’s certainly pretty pointless to write a fundamental analysis on AMC, given what has happened to the stock multiple times based on WSB interest and retail investor sentiment. But I think a delta-neutral strategy makes a lot of sense.

On the other hand, AMC’s stock is limited by a loss of confidence among the WallStreetBets retail trading community. I know this is oversimplified, but for 30-day exposure, this may be the relevant metric to watch. Especially since investors buying AMC stock don’t necessarily care about the company’s fundamentals.

To the downside, AMC stock is supported by short-covering-induced buying pressure. As of August 21, AMC’s short interest as a percentage of float is over 18%. And possibly, seeing what has happened with BBBY, short sellers will likely use the weakness as an opportunity to close out risky trades against WSB favorites (note that a subreddit dedicated to AMC has over 450k members).

risks

Trading based on AMC is risky, regardless of the strategy. While I personally don’t think AMC will go “to the moon” in the next few weeks, I can’t predict the future and I could be wrong. Investors should consider that the options strategy presented in this article protects them from a +/-20% move. But if AMC goes to $30 per share, for example, the loss would be 3:1. That said, investors can be quite creative with the options market and can structure different strikes and different durations. But considering the 95 rating of volatility with >150%, I think it’s important to be a seller, not a buyer, of the options.

conclusion

As the uncertainty surrounding AMC stock has exploded in recent days, the implied volatility of the AMC stock option has exploded to exceptionally attractive levels, and I argue that there is an opportunity to harvest the volume selling a horse. Personally, I sell the September 30 AMC 100% Moneyness ($18 strike reference) for a premium of about 20% compared to theoretical exposure (implied volatility reference at about 155%). If AMC closes ATM, investors get a return of 22%, which is an annualized return of 515%.

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