Hello everyone, welcome to budgetholics. Here’s a short overview of what happened in the second installment of Wall Street Bets vs. Hedge Funds: The AMC Saga
The Problem With Shorting
As I said in the GameStop video, the problem with short-selling a stock is that your losses can be virtually infinite, compared to your losses which can only be limited. This is a lesson that Hedge Funds are refusing to learn, causing them to lose $5 billion in a day. Similarly to the GameStop Saga, a question about whether these are Covered or Naked shorts has been raised, causing AMC to start a stock recount last Wednesday which will be completed by the 9th of June. Once again, naked, or ‘synthetic’ sorts are illegal, however, when it comes to Hedge Funds and large institutional investors, the rules don’t always apply.
Gamma Squeeze
As was the case with GameStop, the large short positions were identified by retail investors who then started a short squeeze, after sharing their research on the WallStreetBets subreddit. Instead of buying stocks, many Apes, or Degenerates, as they like calling themselves, opt for call options. An option is a financial derivative that gives the holder the right to buy or sell an asset at a predetermined price at a set date. As the value of a stock fluctuates during a trading day, so does the value of those derivatives, since the probability of the buyer of an option to exert their right increases or decreases. These changes are captured by a number of variables, one of which is gamma (γ). Anyone who sells options is short gamma. Gamma is highest when the price of the options sold is very close to that of the underlying stock. According to Reuters,
“Market makers who sell options may ultimately have to deliver the underlying stock, so they risk heavy losses if they have to pay more than they bargained for. To hedge their exposure, they often buy or sell shares of the underlying stock. In the case of AMC, hordes of call options buyers left market makers with a massive short gamma position that grew as the share price inched closer to the high strike prices held by bullish investors. As the share price skyrocketed, market makers bought AMC shares to offset their exposure, adding more fuel to the rally, analysts said. That is a gamma squeeze.”
AMC Investor Connect
In order to connect with investors, AMC’s CEO has interacted with redditors. They recently announced they’d be introducing the AMC Investor Connect as they “intend to communicate often with these investors, and from time to time provide them with special benefits at our theatres”. Moreover, the company announced: “We start with a free large popcorn on us, when they attend their first movie at an AMC theatre this summer.”
Stock Overview
The company didn’t just sit on their tendies (WSB lingo for gains). Instead, they sold some stock to start paying off debt. This got some negative publicity, as some investors saw it as a dillutive move, while others saw it as a move towards a more sustainable company. Depending on hodlers’ time horizon, this was either a good or a bad move. Personally, I don’t believe there is something fundamentally bad with AMC’s business model. Despite the advent of TV, Blockbuster (R.I.P.) and Netflix, people still go to the cinema. This doesn’t mean that AMC doesn’t have any room for improvement. When it comes to buying, selling, or holding, I believe AMC is a decent long term stock, although the current price is a bit too volatile for my liking, and possibly a bit inflated.
