• In a strange turn of events, AMC Entertainment (AMC) is now a theater chain that also mines
• The latest short squeeze failed at key resistance
• Investors should short AMC stock above recent highs in a defined risk manner while collecting a rich option premium

Source: Ian Dewar Photography / Shutterstock

Alex Sirois took a deeper dive into the reasons behind AMC’s (NYSE:AMC) new partnership with Hycroft Mining Holding Company (NASDAQ:HYMC). He, like many others, was baffled by the acquisition from a strategic standpoint. Miners and movies don’t have much synergy, in my opinion.

But to me, the motivations behind it were pretty clear. AMC CEO Adam Aron knows a good short squeeze when he sees one. Now he is helping Hycroft do the same.

Remember AMC took huge advantage of the parabolic move in its stock last May by selling $1.2 billion in stock offerings. Aron himself unloaded millions of his own shares. That’s not exactly a ringing long-term endorsement for the company.

We are seeing more of the same sort of short squeeze shenanigans today by fellow meme stock company GameStop (NYSE:GME). It just announced it will seek shareholder approval to issue 700 million more shares for a potential stock split and share issuance. In essence, GameStop is taking advantage of the recent red-hot rally to sell stock. Traders should do the same as well.

Shares of GME are up sharply on the news, and AMC stock has rallied in sympathy. It’ll be interesting to see how long it lasts.

The Technical Take on AMC Stock

Shares reached extremely overbought readings before weakening. Its nine-day relative strength index (RSI) printed over 80. This was the loftiest level since the parabolic squeeze and subsequent fail last May.

MACD followed suit with a similar pop and drop. Bollinger Percent B raced past 100 only to reverse course and pull back sharply. AMC stock was trading at a big premium to the widely followed 20-day moving average.

Source: The thinkorswim® platform from TD Ameritrade

The last time all of these indicators aligned in a similar fashion marked a major top in the stock. Expect more of the same once again.

AMC had a key reversal day last Tuesday. The stock traded higher and reached new recent highs, then tried to break out past the $35 major resistance level. Ultimately, the breakout attempt failed and shares closed basically unchanged on the day. This type of price action, called an evening doji star, is a reliable trend reversal pattern.

The buyers have finally become exhausted, and the sellers are back in control. It is an even more powerful signal given that it took place after such a sharp move higher and at major resistance. $35 will likely be a line in the sand for months to come.

I didn’t always have a somewhat bearish opinion on AMC stock. My prior article on AMC from March 16 reflected a more bullish outlook with shares trading near $15. Now that the stock has risen more than 60%, my viewpoint has changed in kind. Price does matter.

AMC stock is risky to short and tough to borrow even if you wanted to short it. Luckily, the options market provides a way to reduce the risk and still get solid returns.

How to Trade AMC Now

Implied volatility (IV) has popped much higher to the 150 level recently. This means option prices are more expensive, which favors selling strategies when constructing trades. Selling an out-of-the-money defined risk call spread makes probabilistic sense.

Sell AMC stock June $36 calls and buy June $38 calls for a 30-cent net credit.

The maximum gain on the trade is $30 per spread. Maximum risk is $170 per spread. The potential return on risk is 17.6%. The short strike provides a 38% upside cushion to the current price of AMC stock. It is structured above the major resistance level at $35.

The short call spread is also a natural hedge to the previously recommended June $10/$12 bull put spread. Since the strike widths are both $2 wide and expire in June, there would be no additional margin requirement to create the iron condor position.