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AMC Gamma Squeeze: Free Popcorn Is Worth $16 Billion

By Evan Niu, CFA - Jun 3, 2021 at 9:15AM

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The movie-theater chain wants to engage directly with its retail investors, who responded by sending shares up 102%.

Who would have thought that free popcorn could be worth $16 billion? AMC (AMC -4.01%) has had quite an eventful week, starting with a deal on Tuesday to sell Mudrick Capital 8.5 million new shares for $230.5 million. The institutional investor reportedly turned around and unloaded all of its shares on the same day after the news sent the stock higher. Mudrick now has valuation concerns, it seems.

That also means Mudrick missed out on Wednesday's epic 102% rally, which added $16.4 billion to AMC's market value and was apparently triggered by an offer of... free popcorn.

People wearing masks watching a movie in a theater

Image source: Getty Images.

Embracing retail traders

Yesterday morning, AMC announced that it was creating a new program to allow the company to engage directly with its retail investor base. The retail movie chain estimates that over 3.2 million retail investors now hold over 80% of total shares outstanding, and traders on Reddit's WallStreetBets (WSB) subreddit have been widely credited with driving the volatility.

Ahead of AMC's annual shareholder meeting next month, the company wants investors to sign up for its new AMC Investor Connect platform. Shareholders who join the new service will receive a variety of special benefits, starting with a snack.

"We intend to communicate often with these investors, and from time to time provide them with special benefits at our theatres," CEO Adam Aron said in a release. "We start with a free large popcorn on us, when they attend their first movie at an AMC theatre this summer."

Other planned perks include shareholder-exclusive promotions such as free and discounted items or invitations to special screenings. Aron will also communicate directly with investors and provide updates around AMC's position in the industry.

Two squeezes are better than one

If you think that a 102% surge that added $16.4 billion to AMC's market cap based on an offer for free popcorn is unwarranted, then allow me to welcome you to 2021. AMC is among many prominent meme stocks that have skyrocketed this year, thanks primarily to the collective action of day traders rather than major improvements in company fundamentals.

To be clear, AMC has capitalized on the attention by having debt effectively extinguished and regularly selling new stock into the rally through multiple at-the-market (ATM) offerings (as well as the Mudrick deal). These moves have undoubtedly strengthened AMC's balance sheet, but the company's recovery remains ongoing and precarious (revenue was down 84% last quarter).

More importantly, AMC's monstrous rally on Wednesday looks to be another combination of a short squeeze combined with a gamma squeeze. A short squeeze is when bearish traders who previously sold the stock short scramble to buy the stock to close out their positions. Conditions have been ripe for AMC shares to experience one, according to short-selling analytics specialist S3 Partners.

A gamma squeeze occurs when options traders buy large quantities of out-of-the-money (OTM) call options, which forces the market maker to buy stock in order to hedge their risk exposure. As the stock continues to rise, those market makers must continue buying more and more stock to maintain the delta hedge, further contributing to the rally.

OTM weekly call options are one of WSB traders' preferred methods to speculate, although the terminology used on WSB to refer to OTM weekly call options is unprintable here. Judging by the sheer volume of OTM weekly calls traded yesterday, with many specific strikes seeing tens of thousands of new contracts being traded, it's clear that a gamma squeeze is adding fuel to the fire. 

Evan Niu, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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