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AMC stock has been on a wild ride over the last year, but it could be a very profitable ride for those who know how to trade it. In just a few minutes, you'll know exactly how.
The pandemic and resulting lockdowns were especially rough on businesses that relied on groups of people gathering indoors. Cruises, sports, and live entertainment were virtually shut down, and your favorite restaurants were left to scramble to stay afloat on just take-out.
Movie theaters were shuttered, too, and AMC Entertainment Holdings Inc. (NYSE: AMC) was among the casualties. Shares of AMC fell by nearly 70% amid the start of the pandemic last spring.
But then something curious happened. AMC stock took off like a rocket. The combination of a short squeeze and renewed optimism about the economy recovering made AMC a meme stock in January. That pushed AMC up over 800% higher. It's currently up about 400% on the year, despite another 70% crash between January and February and a 35% dive in March.
The constant ups and downs might be gut wrenching for investors who are holding the stock. But this is prime territory for traders who know how to get in and out with profits.
How to Trade AMC Stock
Its earnings on May 6 were the latest catalyst.
Shares fell by around 20% leading up to the earnings report, only to rebound 35% since May 6.
Despite predictably poor earnings considering theaters were mostly still closed last quarter, the coming reopening has lifted prices again. Investors are not sure what to do with the stock. Did the stock already price in future business? Or was the price spike just a distraction for a stock that is now on the road to recovery?
Money Morning Chief Investment Strategist Shah Gilani thinks the stock is about to respond to the reopening and move higher. Unlike all the hype that stocks like AMC had in January, real earnings are likely to grow now as real business improves.
Of course, it is always hard to invest with possibility, albeit unlikely, of future government mandated restrictions should COVID-19 cases rise again. That's why Shah is recommending a lower-risk play on AMC using a call spread.
If the stock moves – and holds – above $10.15, where it is right now, he suggests buying the AMC June 18, 2021 $12/$13 call spread.
Put another way, buy the $12 strike price call and simultaneously sell the $13 strike call. Shah likes it at a cost of $0.20, or a net of $20 on the contracts, but it's a little pricier now that the stock has moved higher. You can adjust the expiration dates or strike prices to reduce your costs as long as you're confident the stock will get there.
This options strategy reduces your up-front cost (risk) and still allows you to profit from a rally. The only catch is that if the Reddit crowd realty sinks their teeth into the stocks, your profit would top out as the stock reaches $13 a share.
But still, your $0.20 per option investment would be worth $1.00 – a five-to-one gain. And your downside would be limited to the price you paid to get in.
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Click here for the full story and the next three plays he has his eye on.