AMC Entertainment (NYSE:AMC) stock continue to trade sideways after the latest lunacy failed at the $50 level.
It’s important to remember that these red-hot rips higher were fueled by short squeezes and not actual fundamentals. The meme momentum mania has passed, or at least paused. Time to fade every rally attempt on an extremely overvalued AMC stock.
InvestorPlace contributor Muslim Farooque took a deep dive into the fundamentals in his recent article. He noted the combination of onerous debt loads, continued cash burn and lagging attendance are serious headwinds for company moving forward. Add in some serious dilution from the recent capital raises and it is difficult to make a case for owning AMC stock anywhere near current levels.
A look at the last four earnings reports shows just how much cash is being burned. AMC has lost over $10 per share in the past year and is expected to lose money again next quarter. That’s certainly not a great backdrop for a company that is facing increased competition from the likes of Netflix (NASDAQ:NFLX) and now Apple (NASDAQ:AAPL).
As a big James Bond film fan, I definitely am looking forward to going to the theater to see the latest Bond release No Time To Die. So I thought I had better check on the availability of tickets.
When I looked on Fandango for last night for the 7:30 show, only six of the 75 seats had been sold. This was at the AMC South Barrington theater near me and it was about an hour before showtime. That definitely doesn’t bode well for the return of the in-person cinema experience, especially given that Bond films normally bring in big-time box office revenues.
Technical Take On AMC Stock
AMC is back to a neutral reading from a technical perspective. The nine-day relative strength index bounced of oversold levels but with little conviction. The moving average convergence divergence improved but has yet to generate a fresh new buy signal. Momentum has turned higher but remains slightly negative.
Shares are back in the trading range bounded by $40 to the upside and $30 to the downside. AMC stock is still below the 20-day moving average at $41.13. More importantly, AMC is seeing a series of lower highs since falling from short squeeze parabolic highs in late May near the $70 level.
This likely signals the buyers have become exhausted and the upside momentum has certainly softened.
I touched on a similar scenario in my previous article on AMC from Aug. 26. In essence, very little has changed since that time. I recommended selling an October $50/$60 call spread for a $1 net credit. That trade is working out with the spread now trading at just 20 cents as expiration approaches in a little over a week.
As the saying goes, “If it ain’t broke don’t fix it.” So, to position to be a willing seller of any rally in AMC stock, another out-of-the money bearish call spread continues to makes sense.
How To Trade It
Sell AMC Nov $50/$60 calls spread for $1.10 net credit
Maximum gain on the trade is the premium received of $110 per spread. Maximum risk is $890 per spread. Return on risk is 12.35% in 43 days, or just over 160% annualized. The short strike price provides a 31% upside cushion to the $38.14 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.