Shares of AMC Entertainment (NYSE:AMC) continue to consolidate in a well-defined trading range. AMC stock has certainly lost the most of the meme momentum from last May. The upside may be limited going forward, but the downside may be as well. It’s a good time to use option spreads to harvest still rich option premiums from the ongoing sideways chop in AMC.
People are starting to return to the theaters. AMC Entertainment CEO Adam Aron noted that 60 million more people went to movies in Q4 versus Q3 even at the height of omicron. Mr. Aron also went on to say that revenues per patron in Q4 2021 were 25% higher than Q4 2019.
He believes that the box office is set to double in 2022 versus 2021 and called the death of the movie theater “a load of cow dung.” Certainly strong words from the head of the company.
There is some hope now that movies production is back in full force. Recent release The Batman has already taken in $250 million worldwide in the first weekend. Expected blockbusters Top Gun: Maverick and Avatar 2 are also slated for release in the coming months. This summer will likely be the first step towards returning to some semblance of normalcy.
AMC now has the resources to outlast the pandemic. The company raised a staggering $1.8 billion dollar war chest during the parabolic stock rise last May. You can thank the r/WallStreetBets Reddit crowd for much of that move. Previous bankruptcy concerns that surrounded AMC have been now been put to bed. Yet people continue to underestimate AMC.
One person who doesn’t underestimate AMC stock is InvestorPlace contributor Mark Hake. He feels that AMC stock could rise to $18 by year end. He points to the positive free cash flow and the third highest grossing weekend in two years as signs the worst may be over. The recent price action in AMC stock supports that notion.
AMC in the Last Year
AMC stock is still trapped in a trading range. $15 is major downside support while $20 is overhead resistance. The technical indicators, like 9-day RSI, MACD and Momentum, are all stuck in neutral as well. Shares continue to hug the 20 day moving average at the $17.50 level.
Source: The thinkorswim® platform from TD Ameritrade
It’s interesting to note that AMC stock returned to exactly the same price point where the parabolic lift-off began in earnest last May. This further validates the $15 support level.
The options market is certainly reflecting the sideways action in AMC stock. Implied volatility (IV) is at the lowest level in the past year. It is, however, still extremely rich. Currently the June options are carrying an IV well above 100.
This high level of IV favors incorporating some option selling when constructing trades. So to position for further consolidation, a bullish out-of-the-money put credit spread makes probabilistic sense.
My previous recommendation from January 18 used a similar strategy, which ended up being profitable. It is a way to capture rich option premiums and get paid now while positioning to be a buyer at lower levels, all in a defined risk fashion. That is always an important concept but especially true in this market environment.
How to Trade AMC Stock
Buy the AMC June $10 puts and sell the AMC June $12 puts for a 70 cents net credit.
The maximum gain on the trade is $70 per spread. The maximum risk is $130 per spread. The return on risk is 53.8%. The spread is 8 deltas net long at inception, the equivalent of being long 8 shares of AMC stock.
The short $12 strike price provides a 15% downside cushion to the March 16 $14.51 opening price of AMC stock. Traders will a more neutral outlook could simultaneously sell out-of-the money call spreads to bring in additional premium and have a less bullish outlook.
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.
