AMC Entertainment (AMC) Takes the Lead in Unusual Options Activity

One of the publicly traded companies that defined the meme-stock phenomenon, AMC Entertainment (AMC) again finds itself in unfortunately familiar territory: struggling for positive momentum. However, this time around, the cineplex operator faces severe macroeconomic pressures to magnitudes previously not witnessed for many years. Not surprisingly, AMC stock attracted attention in the derivatives market but not for encouraging reasons. Still, contrarian gamblers might have some modest reason for hope.

Late last week, AMC stock fell sharply as the underlying company announced a $110 million capital raise. As well, it called for a reverse stock split that will require shareholder approval. Specifically, the new capital raise will materialize through the sale of AMC’s preferred equity “APE” units to Antara Capital, LP in two tranches at a weighted average price of 66 cents per share.

For the record, APE closed at 68.5 cents on Dec. 21. On Dec. 23, it closed at $1.73. In the trailing five days, APE returned stakeholders a handsome profit of 133.78%. Still, it should also be noted that on a year-to-date basis, APE tanked 71.17%.

In addition, AMC’s board seeks to hold a special meeting for AMC and APE stakeholders, with one of the points of discussion involving a “reverse-split of AMC common shares at a 1:10 ratio.”

Adam Aron, Chairman and CEO of AMC Entertainment stated in part, “AMC’s ongoing capital raising efforts and balance sheet strengthening continues in earnest. We have agreed with Antara to raise $110 million dollars of fresh equity capital, taking our total equity capital raised through the sale of APE units to $272 million of additional cash over the last 90 days.”

“Clearly, the existence of APEs has been achieving exactly their intended purposes. They have let AMC raise much welcomed cash, reduce debt and in so doing deleverage our balance sheet and allow us to explore possible M&A activity,” added Aron.

Still, investors remain skeptical about AMC stock. For its latest third quarter report, the cineplex operator posted a loss of $226.9 million despite generating better-than-expected revenue of $968.4 million. It came as little surprise, then, that AMC attracted significant attention in the derivatives market.

AMC Stock Becomes the Most Unusual Trade Heading Into Christmas

After the close of the Dec. 23 session, AMC stock jumped to the top of the heap in terms of unusual options activity. Specifically, traders piled into the $2 puts with an expiration date of Feb. 17, 2023 – or 56 days since the placement of the order until expiration. Volume reached 41,440 against an open interest reading of 747.

In addition, the implied volume on the trade – or the estimated volatility of the option strike over the period of the option – hit 243.68%. The bid-ask spread as represented by the midpoint price (28 cents) came out to 53.57%. On the shortened Friday session, AMC stock closed in the open market at $4.40.

Further, data from MarketBeat.com revealed that during the aforementioned session, traders purchased 274,997 put options on AMC stock. This represented an increase of approximately 11% compared to the average volume of 248,288 put options.

The rise in demand for put options generally corresponds with negative sentiment toward AMC stock. For instance, Barchart.com’s technical analysis indicator suggests that the average gauge for the cineplex operator is 100% sell. From all angles – short, medium and long term – AMC features poor mobility projections.

Moreover, analysts have a dim view of the underlying business. Three months ago, covering analysts held a consensus “moderate sell” rating, broken down as three holds and two strong sells. In the current month, both the assessment and the individual breakdown remained the same. Significantly, no analyst bothered to stick the neck out with a bullish rating.

Why AMC Could Surprise Onlookers

To be fair, investors should approach AMC stock with a high degree of caution. While I personally own shares, I sold off a significant amount before the meme-trade phenomenon imploded. Therefore, what little I own represents a gamble with “house money.” Presumably, though, most traders are not in the same boat. Still, there could be an outside chance that AMC bounces higher in 2023.

Fundamentally, cineplex operators suffered sharply because of the relatively disappointing results for “Avatar: The Way Of Water,” the sequel to the blockbuster “Avatar.” Although the film posted around $435 million globally in sales during its debut weekend, the domestic haul wasn’t quite up to snuff. As well, China’s market suffered a significant blow, falling short of expectations.

Still, in the latter’s case, COVID-19-related headwinds imposed likely a one-off headwind against moviegoing demand. Remove the restrictions and the narrative could have been much better. Regarding the former situation, Americans just got done getting beat up with an inflation problem unprecedented in modern times. Consumers aren’t exactly in the mood to spend.

However, the original Avatar also started off slowly, releasing during the aftermath of the Great Recession. Nevertheless, it managed to become the biggest grossing film of all time. Though history isn’t guaranteed to repeat itself with the sequel, Avatar 2 may just need some patience.

Plus, with the Hollywood machinery understanding that it needs to focus on big, compelling blockbusters, there will be more opportunities for AMC to make up for lost ground. It’s not a complete endorsement. However, it might be inaccurate to say that AMC is completely without hope.

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