Highly speculative penny stocks like AMC Entertainment ($AMC) are inherently risky. Often, they fluctuate wildly due to volatility and sentiment rather than strong financials. For risk-tolerant traders, AMC can offer explosive returns, but equally significant losses are always on the table.
However, with options, we can structure trades to control risk while still benefiting from potential upside. This is where the Options Stack comes in—providing a clear and structured way to visualize multiple options strategies, including the bull put spread.
The Bull Put Spread: A Calculated Speculative Bet
The bull put spread is a straightforward strategy that allows traders to take a slightly bullish stance on AMC while keeping risk manageable. By using the Options Stack, we can clearly see how different levels of aggressiveness affect the risk/reward balance in this trade.
A bull put spread involves selling a put option at a higher strike price and buying a put option at a lower strike price to cap potential losses. This structure allows traders to collect a net premium upfront, making it a credit-based trade. The Options Stack helps visualize the different breakeven points, maximum reward, and maximum loss depending on how aggressively you set the strikes.
Here’s how it works in the case of AMC:
Sell the $4.50 put and buy the $4.00 put for the October 4, 2024 expiry.
You collect a net credit from selling the higher strike put, while the lower strike put limits your downside.
Football Analogy: A Bull Put Spread is Like a Punt
Think of a bull put spread as a punt in football. When you punt, you're taking a calculated risk, betting that your defense (in this case, AMC’s stock price) will hold strong. The line of scrimmage is the current stock price of $4.76. You're betting that the stock won’t fall below a certain level (the endzone you’re defending)—which, in the bull put spread, is the breakeven price.
The breakeven price is where your profits turn into losses if breached. However, just like in football, even if the stock moves against you, you’ve got the lower leg of the spread (like having a defense to protect your goal line) to cap your losses.
The Options Stack: Visualizing the Opportunity
The Options Stack helps break down three distinct approaches to the bull put spread for AMC, allowing traders to visualize both risk and reward more clearly:
Conservative strategy: Breakeven at $4.73. This is below the current price of $4.76, giving you a bit of a safety cushion. It’s the least aggressive approach and offers a wider margin for error, but with a smaller reward.
Balanced strategy: Breakeven at $4.81. This requires the stock to rise slightly above the current price, making it a higher-risk, higher-reward strategy. The stock needs to show some bullish momentum for this to be profitable, but the reward potential is better than the conservative approach.
Aggressive strategy: Breakeven at $5.04. The stock needs to rise even further to cross this breakeven point, making this the highest risk but also the most rewarding if AMC surges. The narrow margin for error makes this a bold play.
Why This Could Work for AMC
AMC’s elevated implied volatility (IV) at 68.66% compared to its historical volatility (HV) at 31% makes this strategy appealing. High IV means options premiums are inflated, which makes selling options, like in a bull put spread, more profitable. By using the Options Stack, traders can see how they can capture this premium while defining their risk.
The bull put spread allows you to profit as long as the stock holds above the breakeven point, and since we know AMC is volatile, this strategy lets traders capitalize on inflated premiums without outright betting on a massive price move.
Risks to Consider
While the bull put spread defines your risk, it’s still important to note that this is a speculative trade. If AMC drops below the lower strike (for example, $4.00 in this setup), you could face max loss. The Options Stack helps visualize this maximum risk clearly.
Moreover, fundamental concerns about AMC remain. The company has long faced challenges in terms of revenues and debts, and while retail sentiment can fuel short-term runs, longer-term bearish pressures remain a risk.
Final Thoughts
By leveraging the Options Stack, traders can visualize and execute a bull put spread on AMC, a volatile yet speculative stock, with defined risk and premium-collecting potential. The strategy offers a way to benefit from AMC’s elevated volatility while capping potential downside.
For those comfortable with the risks of high-volatility stocks, the bull put spread—whether executed conservatively or aggressively—could be an effective way to profit from AMC’s next move. Using the Options Stack allows you to see exactly where your risk and reward lie, making it a more calculated and manageable trade in a speculative environment.
Disclaimer:
Stock trading involves significant risks and is not suitable for every investor. The strategies and ideas discussed in this article are for informational and educational purposes only and should not be construed as financial or investment advice. Always conduct your own research or consult with a licensed financial advisor before making any investment decisions.
Please note that selling options can expose you to unlimited liability if the underlying asset moves against you. It is crucial to exercise your in-the-money bought options to offset the potential liability of your in-the-money sold options, particularly in volatile markets. Make sure you fully understand the risks and mechanics of options trading before engaging in these types of transactions.
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