AMC: An Opportunity To Play The Options

Thesis

Together with GameStop Corp. (GME) and Bed Bath & Beyond Inc. (BBBY), AMC Entertainment Holdings, Inc. (NYSE:AMC) is one of WallStreetBets‘ (“WSB”) most favorite stocks. Accordingly, the performance of AMC shares has closely tracked WSB sentiment YTD, and following the sharp rise of BBBY, AMC surged more than 100% during the past few weeks. But following the Ryan Cohan disappointment, AMC shares have plunged again and now trade approximately at -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 an enormously profitable opportunity, based on an AMC options strategy: taking advantage of the rich implied volatility, which is currently ranked at the 98 percentile for the past 52 weeks.

The Options Trade

Together with the stock move, implied volatility on AMC options has exploded and is now trading in the top 5 percentile for almost all strikes and durations. I argue this opens an enormous opportunity for options trader to “harvest” the volatility by writing an ATM (at the money) straddle.

For reference, if an investor would sell the $18 strike straddle with September 30 expiration (less than 40% days till expiration), this trade would yield a $4 dollar premium, which is more than 20% of the notional. The trade would be rolled into a new contract with the same conditions; the annualized yield would be close to 515%.

Selling a straddle is a trade strategy where an investor sells both an ATM call options 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 that the investor collects. And accordingly, the break-evens for the strategy referenced above would be +/-20% OTM (out of the money).

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

Why Delta-Neutral Makes Sense

It is arguably quite useless to write a fundamental analysis on AMC, given what has happened with 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 a loss of confidence and trust among the WallStreetBets retail trader community. I know this is overly simplified, but for 30-days exposure, this is arguably the relevant metric to watch. Especially because investors who buy AMC stock do not necessarily 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 more than 18%. And arguably, seeing what has happened with BBBY, short-sellers will likely take the weakness as an opportunity to close out the risky trades against WSB favorites (note that an AMC-dedicated subreddit has more than 450 thousand members).

Risks

Trading AMC-based is risky, no matter the strategy. While I personally do not believe that AMC will go ‘to the moon’ within the next weeks, I cannot predict the future and I might be wrong. Investors should consider that the options strategy presented in this article protects them from a +/-20% move. But if AMC where to go to $30/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 given the 95-volatility rank with >150%, I find it 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 there is an opportunity to harvest the vol by selling a straddle. Personally, I am selling the September 30th AMC 100 % Moneyness (reference $18 strike) for a premium of about 20% vs the notional exposure (implied Volatility reference at approximately 155%). If AMC closes ATM, investors gain a 22% return, which is an annualized yield of 515%.