Long Call Options for AMC Entertainment (AMC) Intrigues But a Better Idea Exists

One of the top enterprises that brought the term “meme stock” into the public domain, cineplex operator AMC Entertainment (AMC) may cut a controversial profile for some investors. Immediately following the initial disruption of the COVID-19 pandemic, the company slipped into crisis mode as government agencies restricted non-essential activities. However, the anticipation of normalcy inspired contrarians to bid up AMC stock.

Of course, another factor centered on the short-squeeze concept. In order to initiate a bearish position, market traders must first borrow shares of the target equity, selling them immediately afterward. The idea here is that the stock will eventually erode in value. When it does, bearish traders can scoop up the shares in question at a discount, making the original lender whole and pocketing the difference.

However, circumstances don’t always pan out so neatly in the free market. To reference boxing legend Mike Tyson, everybody has a plan until they get punched in the mouth. When it came to AMC stock, those that felt the end was nigh encountered a terrifying contrarian force: meme traders decided to take the opposite side of the transaction, skyrocketing shares of the cineplex giant.

Mathematically speaking, no upside price limit exists. Therefore, as prices swung higher, those short on AMC stock faced the prospect of unlimited liability. This sparked panic, forcing those who wanted to close out their short positions to reacquire AMC at ever-rising prices.

Still, like with anything in life, the remarkable phenomenon that catapulted AMC stock succumbed to fading public interest. On a year-to-date basis, AMC dropped over 72% of equity value, seemingly putting an end to the bullishness.

However, news that Amazon (AMZN) intends to spend $1 billion annually on theatrical film releases reinvigorated the sector. In the trailing month, AMC stock gained double digits. Unsurprisingly, it also made some rumblings in the options market.

AMC Stock Brings Back the Intrigue

Following the close of the Nov. 28 session, AMC stock represented one of the top highlights of unusual options activity. Specifically, traders targeted the $11 calls with an expiration date of June 16, 2023 – 199 days to expiration since the placement of the order.

As well, volume reached 20,115 contracts against an open interest reading of 408. The bid-ask spread as represented by the midpoint price ($1.28) came out to 8.59%. For the record, AMC closed at $7.33 in the open market. Therefore, for this trade to be at the money, shares will need to rise a hair over 50%. Given the stock’s mobility, it may be reasonable speculation.

At the moment, the broader sentiment in the options market stands just a tad into the bearish spectrum. Per data from Barchart.com, the put/call open interest ratio for AMC stock is 0.72. Typically, the delineation between optimism and pessimism is 0.70, with figures higher than this threshold indicating that more traders are buying puts than calls.

In addition, analysts remain pensive regarding AMC stock. Three months ago, Wall Street experts pegged shares as a “moderate sell,” breaking down into three holds and three strong sells. In the current month, the consensus assessment remains the same, with one fewer strong sell rating working against AMC.

Nevertheless, the company could be due for one more short-squeeze rally. With high short interest combined with skyrocketing cost-to-borrow rates, any panic among the bears might catapult another big move. Therefore, those long AMC stock have logical reasons for their optimism.

A Better Alternative Exists

As someone who earlier benefitted from the booming AMC stock price and one who maintains a small position (just in case), I’m not about to badmouth the cineplex operator. However, owning a position or not, it’s important to have an objective view of the company.

Fundamentally, one of the major vulnerabilities in AMC centers on its balance sheet. With a high debt load relative to its cash position, AMC isn’t for the faint of heart. Indeed, its Altman Z-Score pings at -0.72, reflecting a distressed business that’s at higher-than-average risk of bankruptcy in the next two years.

Instead, if you absolutely must invest in the box office, Imax (IMAX) arguably offers a better alternative to AMC stock. Fundamentally, the rise of streaming services rendered much of the content offered in theatrical releases moot. Why bother paying top dollar for a romcom at the big screen when you can enjoy such content in your living room?

However, the one area where streaming lags is in action-packed blockbusters. For this genre, the experience that consumers receive at the box office is unrivaled by at-home platforms. Further, Imax projectors offer an unparalleled experience, inspiring people to pay the associated premium.

While I wouldn’t say that IMAX stock is vastly superior to AMC, on a financial basis, it’s a less-bad alternative. In this wacky ecosystem, that basically translates to a win.

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