Two days ago I asked: “Is short-squeeze round 2 on the cards?” The market answered a resounding YES as the AMC share price gains +82%.
The writing was on the wall for AMC Entertainment stock (AMC) as soon as the market discovered that short sellers were back in a big way.
My report from the 26th of May explained how this development had the potential to set off a short-squeeze. At the start of the year, the AMC share price had caught the attention of an infamous investing forum on reddit.
Institutional short sellers had bet heavily against the price of the stock. This bet had paid handsomely. The bleak outlook for the cinema chain saw -70% wiped off the share price in 2020.
However, with the price trading around $2.00, the forum members had realized something professional investors had not.
The forum members at the time totalled around 2 million users (although now over 10 million). If they pooled their resources, they may just force the shorts to cover their bets.
The AMC share price rallied almost +900% in a month before topping out at $20.35. The army of retail traders had given the so-called professionals a bloody nose.
Surely after taking substantial losses, the hedge funds would never repeat the same mistake again?
AMC-The Second Squeeze
At yesterday’s $29.76 high, AMC had rallied +180% in two weeks.
This latest squeeze is estimated to have cost institutions over $1.4 Billion in the last 4 days alone. Although the price did retreat yesterday to $26.73, this is likely to be far from over.
Multiple small options bets on the price going higher are likely to create a self-fulfilling prophecy.
When a trader buys a call option (bullish), a dealer has the other side of the position (bearish). As the market moves higher, the dealers short exposure becomes greater. This forces them to buy the stock, to hedge their position.
This, in turn pushes the AMC share price higher. Which, in turn forces the dealers to hedge even more.
This vacuum is known as a ‘gamma-Squeeze.’ Essentially, the higher the price goes, the options shorts must buy more of the stock.
Until the shorts finally bite the bullet and cover their positions, the AMC share price could go much, much higher.
On the other hand, until they close their short positions, the stock could also go much higher.
As I stressed in my previous report. This is a game best watched from the sidelines. Whilst some will make huge sums of money, others will not be so lucky.
I myself will be interested to see how this story develops.