- The latest short squeeze attempt failed once again for AMC Entertainment (AMC).
- Management continues to be creative to keep the AMC stock price afloat.
- Investors should sell option spreads via an “iron condor” strategy to position to profit as shares remain rangebound.
Shares of movie theater giant AMC Entertainment (NYSE:AMC) continue to consolidate after being sharply rebuked at the $30 area to start the month. This followed on the heels of the latest meme trading melt-up.
Look for further forays into short-squeeze scenarios to play out in a similar fashion for AMC stock in the coming months. The momentum has definitely waned as theaters begin to reopen and reality sets in.
AMC Is Getting Creative
AMC CEO Adam Aron is certainly not afraid to take creative — or possibly controversial — steps to support the AMC stock price. The most recent effort was an acquisition of seven theaters from Bow Tie Cinemas. InvestorPlace contributor Will Ashworth took a deep dive into why this move was window dressing at best.
The addition of seven movie theaters with 66 total new screens won’t make any kind of meaningful impact on the bottom line. AMC currently has more than 10,500 screens across the globe. 66 more is a mere rounding error. Yet shares initially popped more than 5% on the news anyway.
Previously, AMC entered into the mining business by taking a stake in Hycroft Mining (NASDAQ:HYMC). Alex Sirios from InvestorPlace noted the obvious lack of synergy in the deal. He, along with many others, was baffled by the deal.
To me, it was pretty apparent. CEO Adam Aron is willing to go to great lengths to keep the price of AMC stock from dropping. Remember that AMC cashed in big-time on the original squeeze attempt back in May by issuing more than $1 billion worth of stock.
The company will do whatever it takes to keep AMC stock up. But inevitably, it needs actual recurring cash generation to stay in business. AMC hasn’t achieved that in many years.
The Technical Take on AMC Stock
Shares are mired in a well-defined trading range. $30 is serious upside resistance level that has been firmly rejected on previous breakout attempts. Meanwhile, $13 is major downside support that held strong on several occasions. Its 14-day relative strength index (RSI) validates this consolidative pattern, as it hovers just below a 50 reading.
Source: The thinkorswim® platform from TD Ameritrade
It’s interesting to note how each failed attempt to rally AMC stock via a short squeeze resulted in a lower high. This will likely limit any meaningful upside going forward, as exhaustion is setting in at a much quicker pace. The upside fear is fading for AMC stock.
The downside, however, still remains unchallenged. AMC stock is consolidating at the $17 level, well above the prior consolidation point at $13. While the fear may be fading for an upside rip, it is still there to some extent. This will serve to keep the downside limited over the coming quarters.
My latest article on AMC stock recommended selling a bearish call spread to profit from a failure in the latest short squeeze attempt. Readers previously were shown how to sell a bullish put spread to position for downside support to hold. Both of these trades ended up being prescient, as the rally was rejected and the floor in AMC stock was validated.
Selling a call spread and a put spread simultaneously now makes sense given that AMC stock stock continues to consolidate. This “iron condor” option trade profits as long as AMC stock remains within a trading range bounded by the aforementioned $13 and $30 support and resistance levels.
How to Trade AMC Stock Now
Sell the September $13/$11 put spread and sell the September $30/$32 call spread for a net credit of 95 cents.
The maximum gain on the trade is $95 per iron condor sold. The maximum risk is $105. Finally, the return on risk is 90.47% if AMC stock closes between $13 and $30 at the September 16 expiration.
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.