At the time of writing, AMC Entertainment (NYSE:AMC) had a cost-to-borrow (CTB) fee of a sky-high 269.37%, compared to 217.57% at the beginning of the day. The CTB has more than doubled compared to the reading of 111.03% on March 11.
The CTB represents the annual fee that short sellers must pay to borrow stock. According to The Street, the typical CTB fee hovers between 0.3% and 3%. That means that AMC’s CTB is exceptionally high.
A stock’s CTB rises when short seller demand is high and falls when regular investor demand is high. The fee can also increase when there is a shortage of shares to borrow. So, an investor could conclude that short demand for AMC stock is currently very high.
CTB Fee for AMC Stock Continues to Rise
At the same time, a high CTB fee could also be perceived as a positive for long shareholders. When rates are excessively high, shorts may be influenced to cover their positions in a bid to escape the high fee. A higher fee also lowers the chances that a short trade emerges profitable. As explained by S3 Partners‘ Ihor Dusaniwsky:
“An increase in stock borrow rates may force (squeeze) some short sellers into closing their positions — getting out to realize their remaining mark-to-market profits and exiting before other buy-to-covers drive the stock price up.”
This means that short sellers may exit their positions regarding the high CTB fee by buying shares of the underlying stock, which could result in higher prices. That could explain what is happening today, as shares of AMC are up by over 15%.
Based on the latest available data as of March 15, there were a total of 127.21 million shares of AMC sold short with a value of $535.55 million. That’s equivalent to a short interest as a percentage of the float of 24.64%. Generally, a short interest above 10% is considered high, while a short interest above 20% is considered very high.
It’s rational to say that AMC is experiencing a short squeeze today, as all the factors add up. Also helping the price incline is an unconfirmed report that Amazon (NASDAQ:AMZN) and Jeff Bezos are seeking an acquisition of the company.
On the date of publication, Eddie Pan held a LONG position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.