AMC ENTERTAINMENT: Risk-Free Trading
When the percentage return of risk-free trades discounts cash flows
Executive Summary
Panic attacks meet wealth destruction.
Let the monkey lose, and infinity could be the new terminal.
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1. Why Do I Care Right Now?
In theory, the risk-free rate is the return an investor would earn on a completely risk-free investment and is usually expressed as a percentage over one year. In practice, it is difficult to find anything with zero risk. U.S. government bonds seem risk-free as long as the U.S. government doesn't go bankrupt. Subtract inflation, and you have the perfect recipe for anxiety attacks and wealth destruction.
Now that we have the soft stuff out of the way, we can move on to the concept of risk-free trading.
In theory, a zero-risk trade is an entirely risk-free short-term investment in which the investor earns an infinite percentage return, usually expressed with the infinity symbol, with time and space evaporating. In practice, it is difficult to find a trade with zero risk. However, MacroDozer appears to have made the impossible possible as long as our derivative brokers remain solvent. And we do argue that U.S.-regulated exchanges can be more solvent than the Federal Government.
To help you understand the situation better, imagine that you enter a casino. You go straight to the roulette table, and your bet is free. Your family is close friends with the Powells, and Jerome creates that bet for you, for free, digitally, very quickly, as high as you want, out of thin air. The limit is the table maximum. Your chances of winning are a little less than fifty percent, and your chances of losing are zero because Jerome is covering the bill. It would be foolish not to give it a go.
Our AMC setup below is also risk-free, and we reckon there is more than a fifty percent chance that the share price will fall back to 4.00 within the next four weeks. Why? Because we believe that the events surrounding AMC are nothing more than a major financing gig. Apey business. No one seems seriously interested in restructuring or reinventing the core business so as not to suffocate in the vacuum of a shrinking market and a dying industry.
Back to the free bet: you are close friends with MacroDozer, and the limit is the broker's capital requirement for events such as option exercise reversal or temporary price fluctuations due to sudden changes in implied volatility or asset price on the way to maturity. However, depending on the broker, the capital requirement may be zero or even negative, which means that no money is employed, and any profit divided by zero is mathematically infinite. Our broker seems confused and alternates between negative, zero, and slightly positive capital requirements. But for the sake of argument, we assume zero, and for practical trade execution, we plan for a margin of safety.
2. Useful Background Information
We have no words for AMC Entertainment's pure play financing gig. AMC stock, APE stock, splits, conversions, and the hero of the saga, as always: Dilution. No more words about a drama that continues to shift from movie theaters to boardrooms.
For more background information, see our first AMC BrainDoζer.
3. Trade Execution
We understand that occasionally we send out BrainDozer articles just before the market closes. Getting them ready faster is not always possible, but we will communicate trade ideas in real-time via our new subscriber chat feature, potentially already days before. If you want to receive time-sensitive information immediately or feel like chatting with us, please give it a go here.
We are selling a bearish straddle at 4 with wings at 2 and 6 that expires on Mar 17, 2023. If you get filled at or above a credit of 2, the trade will be risk-free with a max loss of 0. If you get filled below a credit of 2, there will be a small risk, and standard trade sizing is back on the table.
3.1 Trade Entry - Jan 19, 2023
Total: 2.03 Credit.
To conclude the magic, we think it is appropriate to return to the rhetorical question posed in the subheading: What happens when the percentage return on risk-free trades discounts cash flows? The percentage return of risk-free trades with no capital employed is mathematically infinite. Any cash-flow-generating project that you discount at infinity won’t be worthwhile to pursue. We strongly advise focusing on the risk-free business instead if you have the luxury.
4. Final Comments
Expect updates on BrainDoζers within 4-6 weeks. We use the exact heading, ending with (+/- xy%), and label the cover cartoon with a red Cloζed stamp. That way, the performance will be easy to follow.
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