Institutional investors turn to options to bet against AMC, meme stocks

June
7, 2021

3 min read

This story originally appeared on ValueWalk

Short-sellers have gotten burned on AMC Entertainment Holdings Inc (NYSE:AMC) and other meme stocks like GameStop Corp. (NYSE:GME), but they’re still betting against them. Short-sellers are trying another tactic to bet against such stocks without getting burned as badly as they have shorting the stocks outright.

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Short-sellers use options to bet against AMC

According to Reuters, some traders are betting against another significant rally in AMC and other meme stocks by making a wager in the options market that will limit their losses if retail investors continue to inflate their stock prices.

The news outlet analyzed options data and interviewed market participants, including a fund manager overseeing $30 billion in assets and a Wall Street banker. The data and interviews show that some institutional investors have started making more complex options bets that the stocks will decline.

The option is called the “bear put spread,” and it’s a common bearish options strategy, although it also places a limit on the profits that are possible by betting against a stock. The increased use of the strategy in meme stocks demonstrates that Wall Street is still betting against meme stocks and looking for ways to profit off the unprecedented increase of retail trading.

However, it also shows that traders are being more careful after some high-profile funds took major hits earlier this year.

Analysis of options data in AMC

Henry Schwartz of Cboe Global Markets talked to Reuters about options trading in AMC, saying that it’s “still dominated by these small retail trades for sure, but we are seeing sporadic big institutions tempted in just by the pricing.”

While GameStop was at the center of the initial wave of retail buying earlier this year, AMC also received a boost. This time around, AMC is at the center of another wave of buying by retail investors following forums like WallStreetBets on Reddit.

Shares of the theater operator are up more than 20% in early trading today, and they were up more than 80% last week. GameStop climbed 1,600% in January on the back of the same phenomenon of retail trading, while AMC is up 2,160% so far this year.

How options work

Reuters explained that when a stock price rises as much as AMC did last week, sometimes doubling during a single trading session, options prices increase. Market participants told the media outlet that moves of such magnitude usually don’t last for extended periods of time. They also said some professional traders are betting it won’t last this time either, so they expect the prices of meme stocks to fall.

The problem is that traders don’t know when the buying will end and the selling will begin. There’s also a question of whether they have the resources to keep their positions open during an extended face-off with retail investors, who move stocks by the power of their numbers.

A bear put spread involves buying one set of put contracts, which grants them the right to sell the stock at a particular strike price by a particular time. It also gives them the right to sell another set with a lower strike price over the same timeframe.

Selling the put options offsets most of what traders pay upfront to purchase the first set of contracts. If the stock doesn’t fall, or if it falls less than expected, the trader’s losses from the purchase of the put are mostly covered by the proceeds from the sale of the put.