Nasdaq reported on Tuesday very unusual AMC Entertainment (NYSE:AMC) put option activity.
According to the report first picked up by Fintel, a rather strange $781.04K block of Put contracts in AMC Entertainment was bought with a strike price of $11.00/share, expiring on April 21, 2023.
Fintel tracks all large options trades, and the premium spent on this trade was 5.07 sigmas above the mean, placing it in the 100.00 percentile of all recent large trades made in AMC options.
But retail investors have noticed AMC Entertainment stock has experienced unusual put option activity ever since the ‘meme stock’ frenzy in 2021.
The derivatives market has been a back door for institutions to flood AMC stock with put option contracts, in one form suppressing the stock from rising or simply having a greater advantage than average investors.
Still, the unusual put option activity in AMC Entertainment stock shows just how aggressive institutions are fighting to keep shares from rising.
These institutions may also be playing ‘naked options’ to profit big on AMC premiums.
What is a Naked Option?
A naked option, also known as an “uncovered” option, is created when the seller of an option contract does not own the underlying security needed to meet the potential obligation that results from selling—also known as “writing” or “shorting”—an option.
In other words, the seller has no protection from an adverse shift in price.
Naked options are attractive to traders and investors because they have the expected volatility built into the price.
If the underlying security moves in the direction opposite to what the option buyer anticipated, or even moves in the buyer’s favor but not enough to account for the volatility already built into the price, then the seller of the option gets to keep any out-of-the-money (OTM) premium.
Typically, that has translated to the option seller winning around 70 percent of trades, according to Investopedia.
Are institutions using naked options for AMC Entertainment?
It’s very possible.
Latest AMC Stock News
AMC Entertainment (NYSE:AMC) stock recently reached a max cost to borrow of more than 1,000% (1.05k%), per Ortex data.
The cost to borrow, per Ortex, is the annualized percent of interest on loans, typically borrowed by brokers and hedge funds.
This percentage figure may change on a daily basis and level out through its ‘cost to borrow average’.
According to the Securities Lending Agreement (SLA), this fee must be charged prior to the stock being borrowed.
Short sellers rely on brokers to have stock shares available to borrow.
If the broker has very few shares of a stock available, then that stock is placed on the hard-to-borrow list, a list AMC Entertainment is currently on.
Stocks on the hard-to-borrow list may not be short-sellable or have higher stock loan fees, hence why we’re seeing AMC’s cost to borrow at 1,000%.
AMC Entertainment is in high demand, both for short sellers and long investors.
Just as the company stock has been experiencing unusual options activity, it’s also experienced a number of ‘glitches’ and discrepancies, as well as scarce shares to borrow.
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About The Author
Frank, this has been going on for 2 years and has no end in sight. This could go on for another 2, 5 or even 10 years. This situation is getting worse for retailers. Until this reaches the FBI, retailers are fucked.
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