Despite an impressive grassroots movement supporting AMC Entertainment (AMC), it must be said that the cineplex operator hasn’t enjoyed a stellar performance. Since the beginning of this year, AMC stock gave up more than 28% of equity value. In the past 52 weeks, shares have stumbled over 56%.
Ever since its meme-stock days, the underlying enterprise has struggled for relevance. Much of the problem centers on consumer shifts in the entertainment landscape. Frankly, the allure of going to the box office pales to competing entities. Further, with the explosive rise of streaming services, the incentive to go to the movies has significantly faded.
Recently, StockStory covered multiple publicly traded firms in the leisure facilities market. Given the challenges of the box office, it wasn’t shocking to discover that AMC “delivered the slowest revenue growth of the whole group.” Invariably, the poor fundamentals imposed headwinds on the trajectory of AMC stock.
However, it’s also true that some of the most beleaguered businesses can post the biggest surprises. Case in point is Marcus (MCS) and Imax (IMAX). Over the past five years, both these companies have posted unimpressive returns. However, they’re absolutely killing it on a year-to-date basis: MCS stock returned more than 30% while IMAX shot up over 62%.
Better-than-expected earnings results made both firms become highlights in Barchart’s J-Pattern (or J-Hook) screener. The J-Hook is a technical analysis pattern implying a higher-than-normal probability of a decisive breakout from a prior consolidation phase.
The thing is, both MCS and IMAX have enjoyed a robust move higher. On the other hand, AMC stock could be the next to blow up (in a good way).
A 355% Payout in AMC Stock!? Here’s How.
Assuming that the strong earnings numbers from Marcus and Imax rubs off on AMC when it reports earnings next Wednesday, the underlying security could skyrocket. I want to be clear: that’s a huge assumption. While the businesses are similar, they’re also distinct. Marcus is a regional cineplex operator while AMC is a global one. And Imax is a projection systems specialist.
Still, AMC stock has struggled due to a string of poor fundamental news. If some positive data comes into the picture, that could be what the security needs to regain its mojo. Should you be willing to accept the high risks involved, there are compelling rewards on tap.
In particular, daring investors may want to consider buying bull call spreads for the options chain expiring next Friday (Nov. 8). A bull call spread is intriguing because it involves two simultaneous transactions: buying a call and selling a call at a higher strike price. Proceeds from the latter (short) leg is used to partially offset the debit of the long leg.
To be clear, the disadvantage of the call spread — aside from the risk of losing 100% of your principle since all options expire — is that the short leg caps the maximum payout. However, the advantage is that the profitability threshold (the gap to breakeven) declines because of the credit received from the short leg.
When you’re dealing with a very narrow time frame (such as next week), I would argue that the capped reward is somewhat of a moot point. Since the option will expire swiftly, there’s not much room for it to breathe.
Barchart’s options screener for AMC stock reveals all the mathematically viable call spreads for the Nov. 8 options chain. From my analysis, the most sensible spreads are as follows:
- 4.00C | 5.00C with a max profit of 163.16%.
- 4.00C | 5.50C with a max profit of 257.14%.
- 4.00C | 6.00C with a max profit of 354.55%.
From the narrowest spread to the widest, the gap to the breakeven threshold sits at -0.23%, 0.68% and 1.14%. Put another way, AMC stock doesn’t need to move much to deliver a positive return.
Risk Factors to Monitor
Now, before you get too excited, in order for the call spreads above to reach maximum profitability, AMC stock must hit or exceed the short leg strike. To get the nearly 355% payout, AMC must reach $6. That’s up almost 37% from Thursday’s close, an unlikely proposition.
What’s more realistic — though still significantly risky — is the idea that AMC stock can hit $5. That would be up 14% from the most recent closing price, which is more feasible. On Thursday, MCS gained 9.9% while IMAX went up 12%. So, if I were trading this call spread, I’d go for the 4/5.
As for the other spreads, I don’t find them particularly compelling. For example, the 3.50/5 spread features a larger gap to breakeven and a very small payout (44.23%). On the other end of the spectrum, the spreads with a long leg of $4.50 or higher may be cheap but are unlikely to be profitable.
By no means is the aforementioned 4/5 spread a no-brainer. According to Barchart, it only has a probability of profit of 50.7%. Still, all things considered, the spread arguably commands the most ideal mixture of risk and reward.
On the date of publication, Josh Enomoto 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.
