Shares of AMC Entertainment (NYSE:AMC) look to have found some footing after a prolonged sell-off. AMC stock is down over 60% from the $60 highs last summer. Certainly, the sell-off was warranted given the manic meme mania that took the stock to ridiculous levels. The selling has now gone too far, too fast. It is time to be a buyer of AMC on any further weakness.
The fundamentals are looking a little better for AMC stock. Traffic is improving and the record-shattering Spider-Man: No Way Home premiere provides hope that in-person movie going might be making a comeback. Mark R. Hake, CFA just penned an insightful research piece for InvestorPlace discussing the reasons to be bullish on AMC stock. He puts a conservative $30 price target on the shares using a discounted cash flow (DCF) methodology.
Technical Take on AMC Stock
Shares are finding a little glimmer of hope from a technical perspective. The 9-day relative strength index (RSI) turned slightly higher after dipping into oversold territory below 30. Moving average convergence/divergence (MACD) is poised to go positive and generate a buy signal on any further strength. Momentum has begun to improve slightly, as well.
AMC stock is trading at a big discount to the 20-day moving average, which has preceded rallies in the past. It is trading at a big discount to the downtrend line, as well.
AMC stock is finally finding some support at the $20 area. This was the lift-off level when the meme mania first began in earnest back in May 2021. It also was the recent low in mid-December as the Spider-Man box office numbers were released.
I expect this level to hold with continued consolidation over the coming few weeks. A move back to the 20-day moving average near $26 would be the initial upside target.
I certainly wasn’t bullish on AMC stock previously. For the past several months, I have been an outright bear. In my previous two analytical articles, I recommended selling bear call spreads, which proved to be prescient. Now that AMC has dropped in price significantly since then, my viewpoint has changed. Price does matter.
Implied volatility (IV) is at just the third percentile, but is still over 100. The relationship between options of the same expiration has flattened considerably. This means option selling strategies still make sense.
To position for a pop, or at least continued consolidation, an out-of-the money bull put spread makes probabilistic sense. It is a similar trade structure to my previous bearish trades, but now selling bull put spreads in place of bear call spreads.
How to Trade it Now
Sell AMC in February at $18 puts and buy AMC in February at $16 puts for a 50 cent net credit.
Maximum gain on the trade is $50 per spread. Risk on the trade is $150 per spread. The return on risk is 33%.
The short $18 strike price provides a 12% downside cushion to the $20.57 previous closing price for AMC stock. It also expires before earnings that are due in late February or early March. This serves to dampen volatility and remove any earnings-related risk.
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 makes weekly appearances on Bloomberg TV “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related. He has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.
