More David vs. Goliath

Hey Traders,

If you thought meme stock mania was finally calming down …

Well, the folks on Reddit would seem to disagree!

This week, several former meme targets began picking up steam once again.

But not everyone’s on board …

Bulls and bears are once more duking it out.

WallStreetBets is screaming “to the moon!” while Wall Street’s bros are holding steady on their shorts.

And, of course, options traders are getting in on the action.

One investor in particular is betting big against extended upside on this ticker.

A Big Bet on Not Total Failure

While Redditors are again encouraging others to pile on the bandwagon, and maintain “diamond hands” (holding your position no matter what), others are betting big against the retail masses.

On movie theater stock AMC Entertainment (Ticker: AMC) specifically, one Big Money investor seems to think that while AMC might not be doomed, per say, the current rally has just about topped out, and they expect AMC to incur some downside in the weeks ahead.

This investor dropped a mighty chunk of change opening a bear put spread on the entertainment name, buying up 6,000 contracts of the June 15-strike puts for $3.65, and selling 6,000 contracts of June 10-strike puts for $0.85.

I find this to be a rather interesting trade.

On Tuesday, AMC shares spent most of the day churning near the $14 mark. By opening 6,000 contracts of the June 15-strike puts, this trader is betting that AMC doesn’t have much more upside left — or at least won’t be able to maintain above the $15 mark through June expiration.

By now, we ought to know that the internet’s attention span is relatively short. Given that these puts have over a month until expiration, it seems reasonable to assume that the current rally will peter out, and AMC will be planted below the $15 mark by the time these contracts hit their due date.

And even though Reddit retail traders are back to their old tricks – piling on GME and AMC this week – so far, these rallies lack the massive enthusiasm and volume they had the first time around.

So, even if these traders decide to rally once again next month, I’m just not sure they’ll have enough volume backing them to push AMC above the critical $15 mark.

Volume just ain’t what it used to be … Chart courtesy of StockCharts

However, what I find interesting about this spread is that while this investor doesn’t think AMC has enough gusto to hold above $15, they don’t seem to think AMC is set to drop like a rock, either.

By selling 6,000 contracts of the June 10-strike puts, they’re banking on AMC holding above the $10 level.

(Perhaps with the economy reopening, this trader is betting that AMC’s theaters will be seeing an uptick in traffic in the coming weeks?)

Bear Trap

Similar to the ARKK trade we looked at last week, opening a bear put spread like this has several advantages.

First, by selling the 10-strike options, this trader is offsetting some of the cost of purchasing 6,000 contracts at the $15 strike.

Instead of handing over a whopping $2,190,000 ($3.65 x 100 shares/contract x 6,000 contracts) to buy these puts, this trader was able to reduce their initial cost to $1,680,000 ($2.80 x 100 shares/contract x 6,000 contracts). 

That’s a cool $510,000 saved ($0.85 x 100 shares/contract x 6,000 contracts), and a maximum profit of $1,320,000 ($5 difference in strike price x 100 shares/contract x 6,000 contracts, minus the cost of the trade).

That’s a mighty big bet, and to me, signals that this investor has reason to be quite confident in their prediction.

Of course, not only does this spread reduce the up-front cost of the trade, but by extension, it also helps limit potential losses.

Furthermore, it also moves up the “breakeven” point of this trade.

By reducing the initial outlay, this trade has expanded the range in which it is profitable — specifically, this trade will start making money if AMC falls below $12.20 ($15 strike minus $2.80 reduced trade cost), rather than $11.35 ($15 strike minus $3.65 initial trade cost).

However, the downside to this is potential profits are also limited. If AMC does drop below $10, this trader will start to see their profits disappear.

This will definitely be an interesting trade to keep an eye on, especially if retail traders continue to target the stocks in the days ahead.

Your Only Option,

Mark Sebastian

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