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The AMC APE's are Back!

By:Nick Battista

Is this a setup for the Mother of All Short Squeezes?

  • APE conversion ruling makes AMC stock pop.
  • CEO Adam Aron beats the drum on the need for raising capital.
  • AMC scored big with Barbenheimer.

AMC Entertainment (AMC) surged from lows of around $4.30 during Friday’s market session up to a high of nearly $7.60 in after-market trading on the back of news related to the APE (AMC Preferred Equity units) to AMC conversion.

The issuance of APE shares was for the most part a fancy, engineered attempt at an additional stock split. APE common shares would potentially be converted into AMC common shares based on a shareholder vote. That would essentially double the outstanding shares (among multiple other stock splits and share offerings). These processes dilute shareholder equity as the outstanding shares in the company increase.

The combination of offerings in the form of APE, stock splits, and additional share issuances were done to raise capital and at the time—avoid bankruptcy and consolidate debt. CEO Adam Aron has continued to beat the drum on the need for raising capital to address AMC’s $5.1 billion in debt, and of course, the fight against those big bad shorts.

Grab your popcorn!

The Delaware Court of Chancery ruled Friday that the company could not move forward with the proposed conversion, based on a lawsuit brought to the court by AMC investors in February. The investors alleged that this conversion was a way to circumvent common stockholders' approval for an additional stock issuance.

Rivals Cineworld and Regal Cinemas recently filed for bankruptcy—and other meme names such as Bed Bath & Beyond have met a similar demise on the backs of higher debt financing rates and declining revenues.

But AMC did get a win this weekend–Barbie and Oppenheimer brought in nearly $300 million in ticket sales in the U.S. and Canada over the weekend!

What does this mean for traders?

Can this be the Mother of All Short Squeezes?

Currently implied volatility is certainly elevated—nearly 200% implied volatility suggests the stock can nearly double—or go to zero—over the next year.

Premarket on Monday, the stock has been trading off the highs of $7.60 down to the mid-$5 range. Option pricing and flow will likely increase to the upside. Traders long the stock might take this opportunity to sell covered calls into this move – the four-day options trade at around $0.50 for the 5.5 strike representing a nearly 10% potential cost basis reduction.

AMC's 52-week high sits at $27.50, representing a roughly $25 billion market cap for the theater chain. The low over that period is $3.77.

AMC one year price chart

Nick Battista, tastylive director of market intelligence, has a decade of trading experience. He appears Monday-Friday on Options Trading Concepts Live. On Wednesdays, he co-hosts Johnny Trades. @tradernickybat 

For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.

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