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A set of huge tranches of AMC Entertainment Holdings (AMC) options traded today as seen in a Barchart report. Meanwhile AMC stock is down over 20% today. Speculators are positioned for a jackpot if AMC stock rebounds by buying a large amount of out-of-the-money calls.
The unusual activity can be seen in Barchart's Unusual Stock Options Activity Report today. For example, it shows that almost 36,000 call options were traded at the $2.50 strike price for expiration on Jan. 19, 2024. That is 149 days from now.
The investors paid 50 cents for those calls, so their breakeven price is $3.00. Given that AMC closed on Aug. 22 at $1.99, this means that these call option buyers expect the stock to rebound at least 50% by mid-January 2024.
Moreover, that certainly gives the investors plenty of time to see whether the price of AMC stock will rise. So, therefore, they won't necessarily have to wait until the options expire to make good money if AMC stock starts to rebound.
What's Up with AMC Stock?
AMC reported improved earnings for Q2 on Aug. 8, 2023, although it is still burning through cash. Some traders are speculating that the company will run out of cash before it turns free cash flow positive - i.e., stops burning through its dwindling cash pile.
That is what has pushed AMC stock down from $5.09 on Aug. 8 to just over $2.00 today.
At the end of Q2, the company had “available liquidity” of $643 million. However, this included $208 million in undrawn lines of credit.
Its actual cash balance was just $435.3 million. That was down $196.2 million at the end of Dec. 2022.
Moreover, its borrowings are high at $4.8 billion, down slightly from $5.14 billion on Dec. 31, 2022.
So you can see that its financial position is in a precarious position. That also leads to investors' speculation that the company is likely to have to restructure its balance sheet, raise additional equity, or generally turn its financial position around.
That could lead to a wipe-out of existing shareholders' equity, and make AMC stock worthless.
Cash Burn Prospects
That is the case unless AMC can turn its cash-burn situation around. Here is what the company is saying. Its net cash from operations (a form of cash flow, but not free cash flow) is still negative, but it improved by to just -$13.2 million for the quarter.
It also said this: “Non-GAAP Operating Cash Generated1 was $99.8 million, an improvement of $47.8 million compared to Q2 2022.” That seems to imply it is cash flow positive. But the reality is that this metric is before debt servicing costs and before deferred rent payback.
The truth is that its free cash flow for the quarter was negative $62 million. That figure included $48.2 million in capex spending and all of its interest payments. However, it does not include debt repayments.
Last quarter it repaid just $34.1 million in debt repayments, according to Seeking Alpha. That is not going to make a very big dent in its huge borrowings.
Where This Leaves Investors in AMC Stock
So, despite speculators' wishes, the outlook for AMC stock does not really look that good. Keep in mind that buying AMC call options at this point is really more akin to a gamble, In fact, it might be that some of these speculators are selling near-term calls to help pay for the long-term expiration calls they purchase.
That is why the options expiring this Friday also likely have had a huge volume, as seen in the table above in the Barchart report.
In other words, some of these speculators are trying to engineer a way to essentially get a free upside in AMC stock. So, unless you are prepared to gamble this like, be careful with buying short or long-term call options in AMC stock.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
