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AMC Stock: Shorts Are Playing With Fire

Iceberg Research has publicly assumed a short position on AMC, which could be dragging the stock's performance on July 2. Here is why this could be a dangerous bet.

AMC stock  (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report kicked off the Friday trading session, on July 2, down modestly. After only a few minutes, the daily losses widened to a more painful 8%.

There is at least one theory for why shares fumbled in the morning: a note from Iceberg Research on Twitter (see below) publicly assuming a short position.

Today, Wall Street Memes explains how this could be a dangerous move even for professional managers, let alone for individual investors who might be tempted to take the bearish side of the argument as well.

Unlimited downside

Shorting a stock, any one for that matter, carries one particular risk that longs do not have to worry about: the potential for unlimited losses. Let's take the example of AMC itself, and look at the worst case scenario for bears so far in 2021.

Assume $10,000 worth of AMC stock had been shorted on the first trading day of January, at $2 apiece. To do so, the trader would have borrowed shares to sell right away, hoping to buy them back in the future at a lower price to close the position.

Now, suppose that the trader could have held on to the position indefinitely – unlikely, due to margin calls and other issues. By early June, when AMC stock price breached $62 per share, the initial $10,000 bet would have led to a painful loss of $300,000.

Keep in mind that the upside opportunity in a short bet is limited to original amount. Bears can only produce a gain equal to his or her original investment, and only if the underlying stock goes to zero. This is an asymmetric bet that does not favor the short.

Mother of all short squeezes

In Iceberg's bearish call, fundamentals were cited first to support the thesis. Few will disagree that AMC Entertainment has been having a rough 2020 and 2021, given the COVID-19 disruptions to the business.

But in this case, little do fundamentals matter, if at all. Considering how much AMC stock has moved in the past six months and is likely to keep moving in the foreseeable future, shorts risk being stopped out of their positions before financial statements are ever brought into the conversation.

Wall Street Memes has recently reported on "the mother of all short squeezes": a thesis, supported by traders like Trey Collins and Matt Kohrs, that AMC stock is ripe for another vicious rally. The "ape community" on Reddit has clearly embraced the cause.

In our recent Twitter poll (see below), optimism about shares reaching and then climbing past $200 is evident. Whether such spike in share price will actually happen is one open question – what is undeniable is the strong bullish sentiment that should serve as a yellow flag for AMC shorts.

2 warning signs for bears

According to Seeking Alpha, short interest on AMC is currently 85 million shares. This is about 5 million more than at the beginning of the year. Should "the moon gang" score an early win in this tug of war, a snowball could turn into a bullish avalanche.

Also, buzz on WallStreetBets around AMC stock died down late in June, as the chart below depicts. But a finger on the pulse of social media suggests that this may not last very long. If history can serve as a guide, bringing AMC to the spotlight could lead to a meme attack and sizable losses for those caught off guard.

Figure 1: WSB sentiment in June for AMC stock.

Figure 1: WSB sentiment in June for AMC stock.

(Disclaimers: this is not investment advice. The author may be long one or more stocks mentioned in this report. Also, the article may contain affiliate links. These partnerships do not influence editorial content. Thanks for supporting Wall Street Memes)