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Why Betting Against AMC Stock Is Still a Bad Idea

Recently, Anchorage Capital shut its hedge fund down after betting against AMC stock and losing. Here's why shorting AMC is a bad idea.

This year, a cinematic battle has been playing out in the stock market. On one side are large hedge funds, and on the other are shareholders of AMC Entertainment Holdings  (AMC) - Get AMC Entertainment Holdings, Inc. Class A Report, also known as "Apes."

So far, the "Ape Army" has been winning, and the hedge funds, which have been shorting AMC's stock, have taken some pretty serious blows.

In fact, it appears that one of the biggest hedge funds betting against AMC's stock -- Anchorage Capital -- has succumbed to its injuries.

Figure 1: AMC theater in Burbank, CA.

Figure 1: AMC theater in Burbank, CA.

AMC shorts have partially recovered their losses in the past few months due to the stock's poor trading momentum. However, the closure of the $7.4 million hedge fund should serve as a warning that betting against AMC stock is still probably a bad idea.

Here's what you need to know.

(Read more from Wall Street Memes: Here Is Why BlackBerry’s Earnings May Boost The Stock)

Why the Anchorage Capital Hedge Fund Crashed

The New York-based hedge fund Anchorage Capital Group has shut down after more than 18 years of capital management.

Anchorage Capital had 4 million put options on AMC, which accounted for 17.8% of its portfolio.

The hedge fund was also betting against other so-called “meme stocks,” with 1 million put options on BlackBerry  (BB) - Get BlackBerry Limited Report, 500,000 put options on Bed Bath & Beyond  (BBBY) - Get Bed Bath & Beyond Inc. Report and 100,000 put options on GameStop  (GME) - Get GameStop Corp. Class A Report.

Anchorage Capital Group had the second-largest short position against AMC stock. In first place is Jane Street Group, which currently has 4.3 million AMC put options.

Figure 2: Top hedge funds betting against AMC stock.

Figure 2: Top hedge funds betting against AMC stock.

Although a letter released by the Anchorage Capital fund's manager didn't explicitly mention its disastrous AMC bets as the reason for the closure, it cited a "cheap money" environment in the markets that has pushed stock and bond prices to higher levels.

Anchorage Capital will return its estimated $7.4 billion in assets to its clients.

Short Sellers Lost Billions on AMC

The latest report by S3 Partners concluded that, until early November, short sellers betting against AMC collectively lost $3.44 billion this year -- even though a recent downturn in share prices helped short sellers to a slight recovery of $20 million per day during October.

With the stock down 35% since October, it's likely the next update will reflect better numbers for short sellers. But they still have quite a way to go before recouping their earlier losses.

AMC stock is highly volatile and -- given the potential for unlimited losses -- presents a much larger risk for short sellers than for buyers.

AMC's volatility has surpassed 153% in a 52-week period. That's almost 10 times the market’s volatility as a whole. Even Apple  (AAPL) - Get Apple Inc. Report has experienced volatility of only 31% this year.

And if history is any guide, it's not unreasonable to expect AMC to go up 100% or even higher. At the same time, it could also drop to nearly zero.

The Planet of the "Apes"

AMC's Ape Army is its biggest strength. These bold shareholders have vowed to buy and hold the stock, no matter what.

Even though AMC stock isn't as popular as it was a few months ago, the Apes are still active on Reddit forums, especially as the stock's short interest remains elevated, at 16.2%. They're still hoping to deliver the “mother of all short squeezes.”

The "meme crowd" is extremely hard to predict. But luck appears to be on their side, given their remarkable gains this year. Any bullish spark may be the catalyst needed for AMC's shares to skyrocket again.

(Read more from Wall Street Memes: AMC Stock: More Popular Than Tesla, Apple, Amazon, and Google)

(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 the Wall Street Memes)