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Bullish On AMC? Consider A Cash-Secured Put Option

By Investing.com (Tezcan Gecgil/Investing.com )Stock MarketsJun 23, 2021 09:38AM ET
www.investing.com/analysis/bullish-on-amc-consider-a-cashsecured-put-option-200587679
Bullish On AMC? Consider A Cash-Secured Put Option
By Investing.com (Tezcan Gecgil/Investing.com )   |  Jun 23, 2021 09:38AM ET
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We recently introduced two exchange-traded funds (ETFs) that could be appropriate for investing in one of the most widely-followed meme stocks, movie theater operator AMC Entertainment (NYSE:AMC). Since the start of the year, AMC shares are up about 2,400%, boosted by retail investor enthusiasm.

In the initial months of the pandemic in 2020, the shares had slumped. Yet, the stock’s fortunes started to change when it caught the attention of traders on social media platforms like Reddit and Twitter. Earlier in 2021, AMC stock rallied amid a short squeeze. The stock price exploded in a matter of weeks. Its 52-week range has been $1.91-$72.62.

AMC Weekly Chart.
AMC Weekly Chart.

Today, we look at AMC stock to see how investors could consider selling cash-secured put options on the company. Such a trade could especially appeal to those who want to receive premiums (from put selling) or to potentially own AMC stock for less than its current market price of $52.61, as we write on Tuesday.

We previously discussed the mechanics of cash-secured put selling using ExxonMobil (NYSE:XOM) stock. Readers who are new to put selling may want to consider reviewing that article.

Selling Cash-Secured Puts On AMC Stock

Investors who write cash-secured puts are typically bullish on a stock during the timeframe that extends to the option expiry date. They generally want one of two things. Either to:

1. Generate income (through the premium received by selling the put), or

2. Own a particular stock, but find the current market price per share (i.e., $52.61 for AMC now) higher than what they'd like to pay.

One put option contract on AMC stock is the option to sell 100 shares. Cash-secured means the investor has enough money in the brokerage account to purchase the security if the price of the stock falls and the option is assigned.

This cash reserve must remain in the account until the option position is closed, expires or the option is assigned, which means ownership has been transferred.

Lets assume an investor wants to buy AMC stock, but does not want to pay the full price of $52.61 per share. Instead, the investor would prefer buying the shares at a discount in the next six to 10 weeks.

One possibility is to wait for AMC stock to fall, which it might or might not do. The other possibility is to sell one contract of a cash-secured AMC put option.

As a result, the put seller would take on the obligation to potentially buy 100 shares of AMC at a certain price (the strike price) by the expiry date, and get paid a certain amount of premium now for taking on that obligation.

So the trader would typically write an at-the-money (ATM) or out-of-the-money (OTM) AMC put option and simultaneously set aside enough cash to buy 100 shares of AMC stock.

Lets assume the trader is putting on this trade until the option expiry date of Aug. 20. As AMC stock is currently $52.61, an OTM put option would have a strike of 50. The seller would have to buy 100 shares of AMC at $50.00 if the option buyer were to exercise the option to assign it to the seller.

The AMC Aug. 20, 2021, 50.00-strike put option is currently offered at a hefty price (or premium) of $17.65.

Readers following the options markets would have noticed that AMC stocks realized and implied volatilities have been soaring. Therefore, option prices (premiums) reflect the high volatility in AMC shares.

In other words, company fundamental or even technical analysis may not necessarily justify these big moves in the shares. But options markets are currently providing opportunities that might be appropriate for bullish investors.

An option buyer would have to pay $17.65 X 100, or $1,765, in premiums to the option seller. This premium amount belongs to the option writer (seller) no matter what happens in the future, i.e. until or on the day of expiry. This put option will stop trading on Friday, Aug. 20, 2021.

Risk/Reward Profile For Unmonitored Cash-Secured Put Selling

Assuming a trader would now enter this cash-secured put option trade at $52.61, at expiration on Aug. 20, the maximum return for the seller would be $1,765, excluding trading commissions and costs.

The sellers maximum gain is this premium amount if AMC stock closes above the strike price of $50.00. Should that happen, the option expires worthless.

If the put option is in the money (meaning the market price of AMC stock is lower than the strike price of $50.00) any time before or at expiration on Aug. 20, this put option can be assigned, and the seller would be obligated to buy 100 shares of AMC stock at the put option's strike price of $50.00 (i.e., at a total of $5,000).

The break-even point for our example is the strike price ($50.00) less the option premium received ($17.65), i.e., $32.35. This is the price at which the seller would start to incur a loss.

On a final note, the calculation of the maximum loss assumes the put seller was assigned the option and purchased 100 shares of AMC at the strike price of $50.00. Then, in theory the stock could fall to zero.

If the put seller gets assigned the option, the maximum risk is similar to that of stock ownership, but partially offset by the premium (of $1,765) received.

Bottom Line

Cash-secured put selling is a moderately more conservative strategy than buying shares of a stock outright at the current market price. This strategy can be a way to capitalize on the wild swings in AMC stock with a measure of prudence.

Bullish On AMC? Consider A Cash-Secured Put Option
 

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Bullish On AMC? Consider A Cash-Secured Put Option

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Comments (13)
Fardin Imane
Fardin Imane Jun 25, 2021 4:36PM ET
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I'm sorry for the government for don't wanted the yours people's activities this marketing now.
Fardin Imane
Fardin Imane Jun 25, 2021 4:33PM ET
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there for were understand the conversation inside Iran don't wanted this and cut relationship between user's today
Fardin Imane
Fardin Imane Jun 25, 2021 4:28PM ET
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today's I can't interning to others programs that the group manĝer is to being free for Persian language but wasn't could
Erikas Ivan
Erikas Ivan Jun 24, 2021 8:23AM ET
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Yes, AMC will still go up to the 🌙
Ilyas Ilkhgg
Ilyas Ilkhgg Jun 23, 2021 5:22PM ET
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haw ar you sar
Pupi Pi
Pupi Pi Jun 23, 2021 4:41PM ET
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No puts, just shares, buy and hold and experience the greatest trip to Moon, soon.
gergely tódor
gergely tódor Jun 23, 2021 4:41PM ET
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Forget it
Lucas Troy
Lucas Troy Jun 23, 2021 3:18PM ET
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You should actually stop giving people advice.
JM AS
JM AS Jun 23, 2021 2:36PM ET
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Amc to the moon, we’re not leaving.
Jay Jey
Jay Jey Jun 23, 2021 2:35PM ET
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It is good idea and it is bullish strategy. Since option premium is elevated, it is very attractive. I do own the stock and sell put and call to collect juicy premium on weeklies.
Adam Smith
Adam Smith Jun 23, 2021 2:33PM ET
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You may not be able to get out if the stock crashes. If this were a "normal stock" you could save yourself by shorting. But you may not be able to borrow the stock to short
Tony Ralt
Tony Ralt Jun 23, 2021 10:17AM ET
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Another stupid idea! It's like drinking non alcoholic beer. There is only one way with AMC, HODL
Stephen Fa
Stephen Fa Jun 23, 2021 9:52AM ET
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crazy trade
Waldemar Gau
Waldemar Gau Jun 23, 2021 9:51AM ET
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buy shares, hold, win
 
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