Bearish traders flock to AMC options amid doubts about stock conversion plan.

Bearish traders flock to AMC options amid doubts about stock conversion plan.

AMC Entertainment Faces Bearish Options Bets Amid Stock Conversion Plan Uncertainty

AMC Entertainment

Shares of AMC Entertainment Holdings Inc (AMC.N) recently experienced a surge in bearish options bets, leading to increased uncertainty surrounding the company’s stock conversion plan. Data from Trade Alert revealed that the one-month moving average of open puts versus call options on AMC hit 1.7-to-1, marking the most bearish measure observed in at least four years.

The primary concern revolves around AMC’s efforts to convert its preferred class of shares, traded on the New York Stock Exchange as “APE,” into its common stock. The company raised capital last year by issuing preferred shares, which trade at a discount compared to the common stock. While the common shares closed at $4.52 on Thursday, the APE preferred shares concluded the session at $1.86.

Once the conversion of the preferred shares is complete, the two share classes are expected to merge. Traders anticipate that the price of the common stock will likely decline, while the APE shares will increase in value. However, AMC faced legal challenges as shareholders sued the company in February, alleging a rigged vote in favor of the conversion. A judge recently blocked a proposed settlement that would have allowed AMC to proceed with the conversion, causing the company’s shares to rise.

Despite the setback, options traders are persisting with their bearish wagers, indicating their belief that the conversion will ultimately transpire. Steve Sosnick, Chief Strategist at Interactive Brokers, stated, “If the deal does go through, it is reasonable to expect that gap to close, and also reasonable to assume that it would close by AMC falling while APE rises.”

AMC Options

With approximately 30% of AMC’s free float already sold short, it has become costly for investors to bet against the company’s shares. As a result, some traders are turning to the options market to execute their bearish strategies. Brent Kochuba, founder of options analytic service SpotGamma, explained, “The short borrow rates are high, which may mean that puts are the best way to get downside hedge exposure.” He also mentioned that heightened stock volatility presents an additional opportunity for traders.

Analysts have also pointed out AMC’s challenging financial situation as a factor contributing to bearish positioning. The company has cautioned that it is burning through cash at an unsustainable rate and may run out of funds by 2024 or 2025 if it fails to raise capital. Garrett DeSimone, Head of Quantitative Research at OptionMetrics, highlighted that such circumstances are typically viewed as unfavorable for a company’s stock performance.

On Thursday, AMC shares closed down 10%, while APE shares rose by 6%. Overall, the stock has fallen by nearly 90% from its 2021 high.

This recent wave of bearish options bets on AMC Entertainment highlights the uncertainty surrounding the company’s stock conversion plan. As traders anticipate the completion of the conversion, the future performance of AMC’s common stock and APE preferred shares remains uncertain. The ongoing legal challenges and the company’s precarious financial state contribute to the apprehension of investors and options traders. However, despite the setbacks, AMC continues to navigate through these challenges, with its shares experiencing significant price fluctuations. As the situation unfolds, market participants carefully monitor the progress of the stock conversion plan, knowing that the outcome will significantly impact AMC’s future trajectory.

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