True to its name, AMC Entertainment (NYSE:AMC) has provided all sorts of fun for speculators. It stands beside GameStop (NYSE:GME) as a mainstay of the meme stock revolution. Ever since bursting onto the scene in January, AMC stock has remained in play, with multiple melt-ups seen since. We find ourselves in the midst of another surge right now.
My commentary today aims to build the technical case for buyers. I’m encouraged by the recent price action and believe it proves the wind is at buyers’ backs. However, before going any further, it’s worth reminding you of the intensely speculative nature of AMC. We’re in the deep end of the pool here. Outsized volatility has and will continue to attend anyone trading the stock. Self-preservation trumps trying to be a hero, so make sure you’re not betting the farm on any trades in AMC or Gamestop, for that matter.
AMC Stock Chart Is Shaping Up
While I’d like to include some bullish statistics about AMC’s fundamentals, it’s not possible. The stock became unmoored from reality earlier this year, and chaos has ruled it ever since. Momentum, hype, hope and crowd delusion are what fuel it now. With that as the backdrop, the only way to make intelligent decisions about trade selection and timing is to use technical analysis.
And that, coupled with the ability to use options to elevate our probabilities, is what ultimately makes AMC compelling to me.
On August 24th, AMC blasted through resistance, kickstarting the current trend. This wasn’t some minor ramp, but a significant surge with over 228 million shares changing hands. As important as the event was, it’s the follow-through that speaks the loudest. Since then, a clear pattern of higher pivot highs and higher pivot lows has developed. Prices now sit on the north side of the 20-day and 50-day moving averages to show bulls control the short-term and intermediate-term trend.
Volume patterns have been encouraging along the way. The trend has been confirmed by higher volume during the advances and lower volume on the pullbacks.
The current two-bar dip has AMC stock testing its rising 20-day moving average. Ideally, buyers will step in to defend the trend and spark the next upswing. But, of course, a rebound in the overall market, which has been retreating lately, would also help.
Two Options Trade Ideas
Implied volatility has exploded alongside AMC’s share price to better bake in the wider range of outcomes. As a result, options premiums are really high. This makes for some interesting trade ideas that aren’t normally available with your everyday stock. When it comes to strategy selection, you really have two paths available to you.
First, you can go for a huge profit potential with a low probability of paying out. Second, you can grab a high probability of profit but with a smaller potential payout. Here’s how I would structure both in AMC stock right now.
Big Reward Trade: Buy the 15 Oct $50/$70 bull call spread for $3.60.
You’re risking $3.60 to make $16.40, but you need AMC to rise to $70 over the next month.
High Probability Trade: Sell the 15 Oct $30 put for 81 cents.
The max reward is $81 per contract and is yours to keep as long as AMC stock stays above $30. The options board is pricing in a 90% chance that this happens. So while your potential profit isn’t as eye-popping as the call spread, you’re still capturing around a 30% return on the initial margin required.
On the date of publication, Tyler Craig 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.
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