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The past week saw the shares of AMC rise by 83.45% with that of Gamestop and BlackBerry also climbing by as high as 11.875% and 32.67% respectively.
According to a new Reuter’s report, some Wall Street traders have taken to betting against shares of AMC Entertainment Holdings (NYSE: AMC) and other companies, e.g. GameStop Corp (NYSE: GME) and BlackBerry Ltd (NYSE: BB), favored by retail investors.
These professional investors are using a wager in the options market that would both limit their losses and reduce their profits if the run off the market goes in the favour of their wager.
.According to analytics obtained from Trade Alert, options trading data points to rise in complex trades that deploys such strategies as ‘put spreads’. From 13% in May, the volume of such trades climbed up to 22% of daily AMC trades. However, the market continued to be driven by retail investors who placed between 85 and 90% of the total daily AMC options volume in the past week.
On Friday, AMC stock lost around 6.6% of its value to close at $47.91. But today in the pre-market, the stock is moving higher, at the time of writing, it is trading at $48.94, which shows a 2.15% rise.
Reasons for the Wall Street Bet against AMC
The past week saw the shares of AMC rise by 83.45% with that of Gamestop and BlackBerry also climbing by as high as 11.875% and 32.67% respectively. These two companies remain the most mentioned names on r/WallStreetBets, with users talking about the likelihood of a second wave of purchases by retail investors.
In the same period, AMC’s stock rose to over 83% bringing the total annual surge to 2,160%, and leaving short-sellers with paper losses of about $4 billion, according to S3 Partners.
Stock movements of this magnitude typically drive up the price of options. However, the movement can rarely be sustained for extended periods, and these wall street traders are convinced that stock prices will fall and the market will experience a reversal.
Where the problem lies however is that the time when the reversal will begin cannot be predicted and these traders do not know if their resources can sustain a face-off with the retail traders, whose power lies in their sheer number.
The Bear Put Spread Strategy
The “bear put spread” trading method is deployed when the trader is certain there will be a fall in the price of an asset and moves to reduce the cost of holding the option trade. It is usually implemented by bearish investors who are looking to minimize losses and maximize profit concurrently.
It is achieved by buying put options at a higher strike price while also selling the same number of puts at a lower strike price within the same time frame. Prior to this time, its use had not been reported. However, the rise in its implementation tells the current story – Wall Street wants to benefit from the rise in retail trading but is being careful to avoid huge losses in the process.