AMC Stock: The Shorts Are Winning, but Their Gains Could Be Short-lived

  • AMC stock has fallen more than 76% so far this year, and short interest in the stock is increasing.
  • High borrow fee rates, however, are a problem for short sellers because they reduce their profits.
  • Unusually high numbers of FTDs indicate that AMC’s stock price might be headed back up.

A Lot of Traders Are Shorting AMC

S3 Partners estimates that short sellers of AMC Entertainment (AMC) – Get AMC Entertainment Holdings Inc. Class A Report stock have made about $1.85 billion so far in 2022. Shares of the movie theatre company have dropped more than 76% so far this year, and AMC Preferred Equity (APE) units have dropped 67% since their debut in August.

AMC Stock
AMC Stock

Short interest in AMC’s stock went up by 14% in October, but it has gone down by about 2.5% in the last week. There is still a high chance of a short squeeze. Short sellers don’t leave a trade that’s making money just because it had a bad week. About 19.6% of AMC’s available shares are being shorted right now, and short sellers have to pay average borrow fees of 18%.

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Why Could Short Sellers’ Profits Be Short-lived?

Even though short sellers are beating AMC’s shareholders so far, their gains may not last long if you look at how much it costs to borrow the stock right now.

AMC Stock

When borrow fee rates are high, above 3%, short sellers are sometimes forced to close out their positions, using up their remaining mark-to-market profits and leaving the stock before buy-to-covers drive the price up. Not only do AMC’s high borrow fees show that there is a lot of demand from short sellers, but they also make short sellers feel more pressure to close their positions and take what profits they can.

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Failures to Deliver Keep Adding Up

Failure to deliver (FTD) is a term used in trading when one of the parties in a transaction doesn’t do what they agreed to do by the settlement date. This can be true for stocks, futures, options, and other assets. FTDs have a lot to do with naked short selling. Since the financial crisis of 2008, it is against the law to sell short an asset you don’t own or have borrowed. This is called naked short selling. “Phantom shares” is another name for these shares that do not exist.

Adam Aron, the CEO of AMC, says that one of the reasons APE units were made was to shed light on any “phantom shares.” In the past few months, the number of FTDs involving AMC and APE has been going up a lot. During the first half of October, there were several days when there were more than 1 million FTDs, and on average, there were 992,000 FTDs every day. Look down.

Compare AMC’s FTD counts to those of Tesla (TSLA) – Get Tesla Inc. Report, which has had an average of 154,000 daily FTDs during the same time period. And GameStop (GME) – Get GameStop Corporation Report, which was also a meme stock, had an average of only 40,000 FTDs per day.

It’s important to know that the U.S. Securities and Exchange Commission (SEC) gives short sellers 35 calendar days after settlement day to close their positions by buying non-delivered securities if they plan to buy an asset once delivery restrictions are lifted.

So, when these deliveries are made after 35 calendar days, there is a chance that the share price of the asset may have gone up. But this technicality is only taken into account when there are a lot of FTDs, usually more than 1 million, as was the case with AMC.

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