AMC a Retail Options Trader Worst Nightmare

AMC, a movie theater chain, gained prominence in the early 2020s when it traded around $2 per share. It then surged to approximately $6–$8 per share before settling back down around the $4 range shortly afterward. During this period, both call option buyers and sellers were able to make money, but call option sellers (writers) benefited particularly well.

Premiums during that time for calls a few standard deviations out were typically about $0.15–$0.22. In other words, on a $20,000 investment, the net cash return from selling a call option was approximately $1,500–$2,200. An important factor to keep in mind is that most option contracts with that level of liquidity and premium were about 30–45 days until expiration. This implied that in a 30–45 day period, you could collect around $1,500–$2,200 in call premium on a $20,000 investment when selling calls a few standard deviations out, or roughly at share prices of $5.50–$7.

The drawback of the covered call strategy is the forfeited upside. However, the advantage is that if the shares were called away (automatically sold in the marketplace), you would receive the strike price multiplied by the shares, which in the above example would total approximately $55,000–$70,000.

In recent years, the security has hovered around the $3–$4 range, with call options a few standard deviations out at $5.50–$6 trading in the $0.10–$0.15 range. This implies that a $30,000 investment over a 30–45 day window could generate roughly $1,000–$1,500 in premium.

One drawback of trading options on AMC is the following: due to a large short interest, the board chose to implement a reverse stock split in order to maintain its listing. As a result, the number of shares investors held was reduced, and the number of option contracts they could sell based on their share holdings was also reduced. A $20,000 investment in 2020 that previously equated to 10,000 shares (or about 100 contracts) was reduced after the reverse stock split.

Over time, the security began trading closer to its fundamental value again around the $3–$4 range, but the damage from the split had already been done. Contract size was reduced, leaving investors with the option to rebuy shares if they wanted to regain their previous contract capacity.

For a long time, this security has been a strong covered call strategy for retail investors. The question now is whether it will continue to provide similar opportunities at these ~$1 levels, or whether investors will see diminished cash-on-cash returns in the options market if another stock split occurs.