Movie theaters are in trouble. With so many ways to consume entertainment content, the box office business model lost its appeal — which is bad news for Cinemark (NYSE:CNK). So, what’s a speculator to do in this case? For CNK stock, it’s time to hitch a ride on the resurgence of the meme stocks phenomenon.
To make a long story short, Keith Gill – who goes by the online moniker “Roaring Kitty” – returned to social media on Sunday, potentially revitalizing the meme movement that he kicked off. Several former trades associated with the phenomenon, particularly Cinemark competitor AMC Entertainment (NYSE:AMC), skyrocketed on the development.
Obviously, the news is more pertinent to AMC. It closed the Monday session up more than 78%. CNK stock returned just under 5%. Still, it’s possible that because AMC has ripped so high, so quickly, speculators could see better value with Cinemark.
Plus, as remarkable as a performance that AMC printed, it’s wildly risky. Even with the stratospheric run, AMC is down 87% over the past 52 weeks. In contrast, CNK is up more than 6%. There’s just more confidence associated with Cinemark, even if only on a relative scale.
Cinemark Could be a Short Squeeze Candidate
Even though Cinemark beat Wall Street projections for the top and bottom lines for the first quarter, the downward trend is evident.
In Q1 of this year, revenue came in at $579 million. However, in the year-ago quarter, sales stood at $611 million. Now, it’s true that the Hollywood writers’ strike impacted the entertainment offerings. Further, industry insiders are looking forward to a more exciting slate in the second half of this year and beyond. Still, the fundamental data isn’t encouraging. And moviegoers are turned off by rising ticket prices.
Interestingly, though, the headwinds have contributed to a dour profile for CNK stock. Currently, short interest stands at a whopping 27.26% of the float. Further, the short ratio (or the time required to unwind all short positions based on average trading volume) clocks in at 13.05 days to cover.
Ordinarily, that’s bad news. However, if CNK stock rises unexpectedly, the bears will find themselves exposed to margin calls. The subsequent covering action could fuel an upside panic, which would be amazing for the bulls.
Trade of the Day: Gamble on CNK Stock Call Options
With the context of the possible short squeeze, hardened gamblers may consider the trade of the day: Buying risky CNK stock call options. Specifically, I’m looking at the 19 July 2024 $20 call.
Frankly, with an ask price of 60 cents and a bid of 45 cents (with the midpoint coming in at 53 cents), the bid-ask spread is incredibly wide at 28.3%. You really have to have conviction that the short squeeze narrative will pan out for this trade to make sense. At the same time, human psychology is powerful, especially when dealing with meme stocks.
On the positive side, this July $20 call features relatively high volume and open interest compared to other derivative contracts. In addition, the implied volatility (IV) comes in at 40.5%, which is not far from the historical volatility (HV) of 32.62%. Given the limited spread between the IV and HV, it might make more sense to buy the option rather than to sell it.
Nevertheless, this is not a trade to hold onto for too long. If you make a profit from it, you might want to book it and leave.
On the date of publication, Josh Enomoto 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.
