AMC Price Plunges, APE Shares Rally After Traders Digest Lawsuit Settlement News
AMC Price Plunges, APE Shares Rally After Traders Digest Lawsuit Settlement News
AMC stock plunged over 23.48% on Tuesday after the movie theater owner announced a settlement in a lawsuit with shareholders on Monday, allowing the company to move forward with a previously approved 1-for-10 reverse stock split. It would also allow the conversion of its preferred equity units—APEs—into common stock. Each APE represents a one-hundredth share of its Series A Convertible Participating Preferred stock.
Investors argued that APEs were used to limit their voting powers. To assuage those concerns, AMC will give one share of common stock for every 7.5 shares held by investors, although the court must sign off on the agreement to finalize the deal. The move clears AMC to raise more capital through common stock issuances. The theater chain will likely use these funds to pay down its debt, which stood at about $4.9 billion as of December 2022, as it awaits a friendlier business environment.
Spread Between AMC and APE Narrows
APE shares lost nearly 80% of their initial value before Monday’s announcement. APE shares have traded at a steep discount to AMC common stock since they were first issued. While the two shares are economically identical, the uncertainty of APE shares being able to convert to common stock is likely factored into the discount.
The spread between AMC and APE narrowed to $2.24 on Tuesday, down from $3.63 the day prior and the biggest one-day percentage decline since August when APE started trading. That price action paid off for traders, who were short selling the common stock while going long the preferred shares in an arbitrage play that relied on a positive outcome regarding the lawsuit.
Because of the high borrowing costs of AMC shares, the spread play was limited to hedge funds and well-capitalized investors. AMC and APE should continue moving into equilibrium since APE shares can now be converted to common stock. However, the ardent, and arguably illogical nature, of some investors—the real “Apes”—may support a small discount for AMC for some time.
AMC Trading Strategy Following Big Price Drop
In the meantime, expect volatility to persist. With a good chance for near-term dilution, it would be surprising to see AMC rebound above the pre-news level of $5 per share. On the technical side, AMC failed to break below a potential area of support around the January low at 3.77.
With an Implied Volatility Rank (IVR) of about 60, a premium collecting strategy utilizing a short call vertical or short put vertical spread offers defined risk trades for those attempting to capture some volatility contraction. For traders taking a neutral assumption on price direction, a short straddle strategy could be considered for those willing to stomach the undefined risk of the trade.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.