(Bloomberg) — Meme-stock is the offspring of AMC Entertainment Holdings Inc’s cash-raising strategy. placed it on the radar of arbitrageurs who saw a golden opportunity to profit from the change in its stock structure.
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The movie theater operator, which has become a favorite among retail traders during the pandemic, is expected to receive investor approval to convert its preferred stock – ticker APE – into AMC common stock next month. One-to-one exchanges are part of a broader strategy to raise cash and stay afloat.
Now, the gap between the two assets is noticeable — and potentially profitable for arbitrageurs.
APE units closed at $2.83 on Thursday while shares of AMC ended the day at $6.08. That means there’s a spread of $3.25, which is unprecedented on Wall Street. AMC was up 5% at 2:10 p.m. in New York on Friday.
“This is the most attractive arbitrage situation available. You don’t often see a six-week percentage plus total return on a high-probability trade, said Julian Klymochko, chief executive officer of Accelerate Financial Technologies.
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To capture the contagion, investors like Klymochko have deployed a strategy common in the world of arbitrage: buying APE units, while also seeking to hedge downside risk should the vote collapse dump and short sell AMC shares. But such a strategy comes with a degree of risk.
Firstly, the cost of borrowing AMC stock to sell short has skyrocketed, posing a challenge even to entering a trade. According to S3 Partners data, about 22% of AMC shares available for trading are currently being sold short, with short selling fees more than tripling this year.
“If you can get a steady loan, it’s a home run. But that’s the point,” said Cabot Henderson, who focuses on mergers and special situations arbitrage at JonesTrading.
Furthermore, the volatile nature of meme stocks – assets that trade at valuations that are different from their real ones – creates an additional layer of complexity for the risk arbitrage community, which often prefers single bets. simple.
Both securities attract individual investors who team up through social media platforms like Reddit’s WallStreetBets and Stocktwits with the goal of squeezing short sellers who profit when stock prices skyrocket.
“The real question for arbs is how to hedge these positions against the possibility of a major short squeeze,” said Henderson. AMC common stock has a high “Tight Score,” which, according to S3 data, ranks the risk that an asset could fall into a short-term squeeze.
One strategy investors are deploying, he added, is hedging using a light rate, shorting less than one AMC for a long-term APE, while others are using short-term positions. options strategy on AMC to protect from unlimited possible losses if investors trigger a short sell order.
(Update transaction)
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