AMC: An opportunity to play options

J. Michael Jones

thesis

GameStop Corp. (GME) and Bed Bath & Beyond Inc. (BBBY), AMC Entertainment Holdings, Inc. together withNYSE: AMC) is one of WallStreetBets’ (“WSB”) most favored stocks. Accordingly, the performance of AMC shares has been After a closely tracked WSB sentiment YTD, and a steep rise BBBY, AMC rose more than 100% in the past few weeks. But after the Ryan Cohan debacle, AMC shares plunged again and now trade about -30% YTD, less than the 12% loss for the S&P 500 (spy).

In this article, I would like to express what I believe to be a very profitable opportunity based on the AMC option strategy: taking advantage of the rich implied volatility, which currently ranks at 98 percent for the last 52 weeks.

Option trading

Along with the stock move, implied volatility in AMC options has exploded and is now trading in the top 5 percent for almost all strikes and durations. I would argue that this opens up a huge opportunity for options traders to “harvest” volatility by writing an ATM (at-the-money) straddle.

For reference, if an investor sells an $18 strike straddle with a September 30 expiration (less than 40% days to expiration), this trade will receive a $4 dollar premium, which is more than 20% of the estimate. The business will be rolled into a new contract with the same terms; The annual yield will be close to 515%.

Selling a straddle is a trading strategy where an investor sells both an ATM call option and an ATM put option. Therefore, the investor is basically betting that upon expiration, the stock will trade near the strike. The margin of safety is given by the premium collected by the investor. And accordingly, the break-even for the above mentioned strategy will be +/-20% OTM (out of the money).

If AMC stock trades between the yellow boundaries highlighted below, investors will make money.

IBKR;  AMC Partnership Performance

IBKR; AMC Partnership Performance

Why does delta-neutral make sense?

It is arguably useless to write a fundamental analysis on AMC about what has happened to the stock multiple times as a function of WSB interest and retail investor sentiment. But I believe a delta-neutral strategy makes perfect sense.

On the upside, AMC shares are arguably limited by the loss of trust and confidence among the WallStreetBets retail trading community. I know this is oversimplified, but for a 30-day exposure, this is a relevant metric to look at. Especially because investors buying AMC stock don’t care about the company’s fundamentals.

On the downside, AMC shares are supported by short covering induced buying pressure. As of August 21, AMC short interest as a percentage of float is over 18%. And logically, given what has happened with BBBY, short sellers will likely take the weakness as an opportunity to close risky trades against WSB favorites (note that the AMC-dedicated subreddit has over 450 thousand subscribers).

Risks

AMC based trading is risky, whatever the strategy. Although I personally don’t believe AMC will go to the ‘moon’ within the next week, 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 +/-20% moves. But if AMC goes to $30/share, for example, the loss will be 3:1. That said, investors can be very creative with the options market and structure different strikes and different durations. But given the 95-volatility rank with 150%, I think it’s important to be a seller, not a buyer, of options.

conclusion

As the uncertainty surrounding AMC stock has exploded in recent days, the implied volatility of the AMC stock option has exploded to extraordinarily attractive levels — and I’d argue there’s an opportunity to harvest volume by selling the straddle. Personally, I am selling the September 30th AMC 100% in the money (reference $18 strike) at a premium of 20% against hypothetical exposure (reference implied volatility at around 155%). If the AMC closes the ATM, investors get 22% return, which is an annual yield of 515%.

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