Shares of AMC Entertainment (NYSE:AMC) are losing their luster after its blockbuster ride. AMC stock continues to struggle to maintain any rally following yet another losing quarter.
The debt-laden company continues to look for any way to further raise capital. The Delta variant and increased competition from streaming will continue to erode demand.
It was only thanks to the Reddit short squeezers that the company is anywhere near current levels. As we found out in other similar meme stocks, ultimately reality takes over. To quote an old Wall Street adage, “When the ducks are quacking, it’s time to feed ’em.”
It’s time to be a seller of AMC stock on any move higher.
InvestorPlace contributor Muslim Farooque just penned an insightful article examining the many headwinds facing AMC stock. He brought up many very valid ongoing concerns for the company, such as a heavy debt load, lack of demand, and increased competition.
I agree totally with his viewpoint and concur that the future remains more than challenging for AMC. There is very little chance that business will return to the 90% pre-covid levels that company executives feel is necessary to remain solvent.
The previous all-time high before the recent insanity began was $34.10 on Nov. 17, 2016. Since then the company has done nothing but bleed cash.
The subsequent 19 quarters since that all-time high have seen 12 quarters with negative earnings per share. The best quarter in that timeframe was a gain of just 43 cents. The worst quarter was a loss of $5.70. Overall AMC has posted a cumulative negative per share loss of over $20 over that period.
The future doesn’t look rosy for AMC any time soon. Analysts expect AMC stock to lose 60 cents for 2022 followed by another negative FY drop of 32 cents in 2023. Perhaps that is why the company sold 11.55 million share on June 3 in an at-the money equity program announced that very morning. The program was completed in just three hours, highlighting just how frothy management thought AMC stock had become.
The selling price was just under $51 per share on average. Not a bad trade by company executives given the current stock price. The June 3 sale followed closely on the heels of an 8 million share sale to Mudrick Capital. AMC was also contemplating a shareholder vote to issue 25 million more shares before it was ultimately shelved in early July. Can’t blame them for trying to strike while the iron is hot.
Technical Take On AMC Stock
AMC continues to look rangebound following earnings. MACD turned positive but is beginning to weaken. Momentum crept just above the zero line but lacks conviction. The nine-day RSI is floundering and is trading at mid-range. AMC stock closed just below the 20-day moving average at $34.92.
There is major overhead resistance at $40 and major support at $30. A break of support at $30 could lead to another leg lower for AMC stock, especially given the recent less than enthusiastic price action. At best, look for this sideways action to continue with no compelling catalysts on the horizon.
The company, it seems, is more than willing to dump shares at the $50 level.
As a trader, I can look to use the options market to do the same. Implied volatility has tempered from the ridiculous extremes seen a few months ago, but is still extremely high with readings well over 100. This means option prices are expensive, favoring selling strategies when constructing trades.
So to position to be a seller at the $50 area, an out-of-the money bear call spread makes probabilistic sense. I can collect some healthy premium now for being a willing seller at $50.
Earnings are due in early November, so prudence dictates an October expiration position to eliminate any earnings related risk. Unlike shorting AMC stock outright, the spread trade also has a pre-determined defined risk. This is certainly very important when trading companies like AMC stock.
Sell the AMC Oct $50/$60 call spread for a $1 net credit
Maximum gain on the trade is the premium received of $100 per spread. Maximum risk is $900 per spread. Return on risk is 11.11% in 54 days, or just over 100% annualized. The short strike price provides a 31% upside cushion to the $34.41 closing price of AMC stock.
On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim has appeared on PBS and the Nightly Business report, while maintaining weekly appearance on Bloomberg TV and CBOE-TV to discuss everything from volatility to LEAPs. Tim has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.