AMC & R/wallstreetbets: A Market Moving Combo

'Meme stocks' are back in fashion, and AMC (AMC - Free Report) is stealing the spotlight with a nearly 200% rally in the past 5 days of trading, and it only seems to be accelerating with another 20% push today alone. Reddit's r/wallstreetbets (WSB) message board and its 10.2 million (self-proclaimed) 'degenerates' are back in the markets with a vengeance catalyzed by a renewed sense of optimism about GameStop (GME - Free Report). This triggered buying in all this cohort's favorite stocks.

The only source that I can identify as the catalyst for the reinvigorated love for meme stocks like AMC, Express (EXPR - Free Report), and Koss (KOSS - Free Report) was GameStop's plan to build out an NFT platform on the Ethereum blockchain. This announcement triggered WSB's 10.2 million retail traders to start buying short-duration calls in their favorite 'short squeezed stocks like there is no tomorrow.

Photo by Clay Banks on Unsplash

WSB seems to be targeting AMC over GME because these shares were trading below $20 (until today, of course) compared to the roughly $240 price tag on one GameStop share. Small retail traders on WSB can afford the cheaper call options on AMC shares as opposed to any GME option. The price was right for AMC shares, and combining that with the overzealous sense of optimism about movie theaters' performance in the new normal caused a domino effect that is driving AMC to the moon.

Most of this week's AMC traders are operating under the assumption that they are causing another short-squeeze, but this is not what's triggering the prolific stock rally, as most of the shorts have already gotten out. What's happening with AMC shares is linked to the short-duration call options that are being purchased in masses. Yesterday, millions of AMC call contracts expiring today traded hands, which had the leveraged impact on the share price we saw.

When one purchases a call option, they are typically buying it from a market maker who will, in turn, purchase the delta equivalent in shares (i.e., if the delta were 0.41, the market maker would buy 41 shares on each contract they sell). The market maker would then adjust the number of 'hedging shares' it needs as the delta goes up or down. Delta's go up with the underlying stock price, and in a situation where calls are expiring soon, delta moves much quicker (aka gamma: the speed at which delta moves). AMC's meteoric rise today was triggered by a 'gamma squeeze' which forced these market makers to buy multitudes of AMC shares as it drove higher.

I wouldn't be touching any of these 'meme stocks,' especially AMC, amid this craziness. This is an interesting case study to follow, as it illustrates the power of social media in this newly democratized financial market.

AMC's CEO, Adam Aron, is accepting the new retail trading community with open arms. He tweeted earlier this month that he has "started to follow Apes (a nickname WSB's users have started calling themselves), to get a first-hand sense of what our community is thinking and saying." Aron is a smart man and knows that this new wave of traders may be this company's saving grace. AMC has been selling vast amounts of new shares at the stock's overvalued price, which it is using to pay down its massive pile of debt, something that has had many investors running for the hills since 2017.

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