AMC Stock Tumbles, APE Shares Rally on Settlement News

AMC Price Plunges, APE Shares Rally After Traders Digest Lawsuit Settlement News

By:Thomas Westwater

AMC stock plunged over 23.48% on Tuesday after the movie theater owner announced a settlement in a lawsuit with shareholders on Monday, allowing the company to move forward with a previously approved 1-for-10 reverse stock split. It would also allow the conversion of its preferred equity units—APEs—into common stock. Each APE represents a one-hundredth share of its Series A Convertible Participating Preferred stock.

Investors argued that APEs were used to limit their voting powers. To assuage those concerns, AMC will give one share of common stock for every 7.5 shares held by investors, although the court must sign off on the agreement to finalize the deal. The move clears AMC to raise more capital through common stock issuances. The theater chain will likely use these funds to pay down its debt, which stood at about $4.9 billion as of December 2022, as it awaits a friendlier business environment.

Spread Between AMC and APE Narrows

APE shares lost nearly 80% of their initial value before Monday’s announcement. APE shares have traded at a steep discount to AMC common stock since they were first issued. While the two shares are economically identical, the uncertainty of APE shares being able to convert to common stock is likely factored into the discount.

The spread between AMC and APE narrowed to $2.24 on Tuesday, down from $3.63 the day prior and the biggest one-day percentage decline since August when APE started trading. That price action paid off for traders, who were short selling the common stock while going long the preferred shares in an arbitrage play that relied on a positive outcome regarding the lawsuit.

Because of the high borrowing costs of AMC shares, the spread play was limited to hedge funds and well-capitalized investors. AMC and APE should continue moving into equilibrium since APE shares can now be converted to common stock. However, the ardent, and arguably illogical nature, of some investors—the real “Apes”—may support a small discount for AMC for some time.

AMC Trading Strategy Following Big Price Drop

In the meantime, expect volatility to persist. With a good chance for near-term dilution, it would be surprising to see AMC rebound above the pre-news level of $5 per share. On the technical side, AMC failed to break below a potential area of support around the January low at 3.77.

With an Implied Volatility Rank (IVR) of about 60, a premium collecting strategy utilizing a short call vertical or short put vertical spread offers defined risk trades for those attempting to capture some volatility contraction. For traders taking a neutral assumption on price direction, a short straddle strategy could be considered for those willing to stomach the undefined risk of the trade.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.

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