AMC superlatives - can we learn from the Tesla mania?
Last week "traders" spent $11.6bn on AMC options according to WSJ (Tesla second at $5,2bn, SPY at $3,07...).
AMC market cap is currently just shy of $25bn. Two weeks ago market cap was some $7.5bn. Churning $11bn in options last week compared to market cap of $7.5bn 2 weeks ago needs little commenting.
You get the point of the AMC mania.
Implieds and realized vols have shot up higher (but have traded higher actually). Vols of this magnitude usually end in tears for "retail traders" that get involved in buying calls at a late stage as theta burns quickly in this "environment".What most tend to confuse is that direction and pace are two different things...and most retail (but surprisingly enough a lot of institutions as well) have little clue of what matters for options pricing.Recall the Tesla options mania that ended in tears for most people? In this case, not only did people pay way to highs vols, that have since then crashed, but direction went against all those call buyers. Tesla has been a huge money losing exercise for all those stimmy retail traders. People learnt how theta works the hard way...AMC stock and trading has been extreme. Options trading has obviously been beyond extreme, try to grasp $11bn of options turnover last week only, mostly executed on screen.Extreme options trading.Not only has trading been extreme, but AMC options are showing extreme features as well. The August at the money strike is trading with a 75 delta, skew is inverted and term structure in full blown "vol panic" mode. People have definitely missed reading Hull, not to mention Taleb's "Dynamic Hedging".Term structure is extreme, sloping downwards, with the the vol shock present across the curve, but obviously felt the most in the short end of the curve. Whoever is buying short dated AMC options, needs to be extremely careful, as theta bleed is huge.SPY has nothing to do with AMC, but note the shape of the term structure for a "normal" and these days boring market.Tesla showed similar "dislocations" in options pricing during the height of the mania, but note the shape of Tesla's term structure these days. Definitely more "boring".Our main point is that you should carefully think about what you are expecting AMC to do before buying all those options, especially the short dated maturities.We won't "derive" it, but volatility is proportional to the square root of time. Hence a 1% move in the underlying is basically 16% implied volatility (regular TME readers know this by now). Most AMC traders are not volatility traders, but volatility matters still.The July expiry, slightly more than a month out, has ATM priced at approx 280% implied vol. Buying that option and hedging it dynamically, you need approx 17.5% daily moves in order to finance your theta (280/16=17.5).This is extreme. Add to this the fact skew is trading inverted, upside is more expensive than downside and you get why so many people will end up in tears eventually.AMC doesn't even have to move lower from here for vols to start falling. All those new call buyers could easily end up burning options premium even if AMC moved small higher as vols are extreme. Recall, do not confuse direction with pace.The question is if AMC will face the fate of Tesla's mania a few months ago and the implosion of options value as theta and "fundamentals" eventually kick in?
AMC market cap is currently just shy of $25bn. Two weeks ago market cap was some $7.5bn. Churning $11bn in options last week compared to market cap of $7.5bn 2 weeks ago needs little commenting.
You get the point of the AMC mania.
Implieds and realized vols have shot up higher (but have traded higher actually). Vols of this magnitude usually end in tears for "retail traders" that get involved in buying calls at a late stage as theta burns quickly in this "environment".What most tend to confuse is that direction and pace are two different things...and most retail (but surprisingly enough a lot of institutions as well) have little clue of what matters for options pricing.Recall the Tesla options mania that ended in tears for most people? In this case, not only did people pay way to highs vols, that have since then crashed, but direction went against all those call buyers. Tesla has been a huge money losing exercise for all those stimmy retail traders. People learnt how theta works the hard way...AMC stock and trading has been extreme. Options trading has obviously been beyond extreme, try to grasp $11bn of options turnover last week only, mostly executed on screen.Extreme options trading.Not only has trading been extreme, but AMC options are showing extreme features as well. The August at the money strike is trading with a 75 delta, skew is inverted and term structure in full blown "vol panic" mode. People have definitely missed reading Hull, not to mention Taleb's "Dynamic Hedging".Term structure is extreme, sloping downwards, with the the vol shock present across the curve, but obviously felt the most in the short end of the curve. Whoever is buying short dated AMC options, needs to be extremely careful, as theta bleed is huge.SPY has nothing to do with AMC, but note the shape of the term structure for a "normal" and these days boring market.Tesla showed similar "dislocations" in options pricing during the height of the mania, but note the shape of Tesla's term structure these days. Definitely more "boring".Our main point is that you should carefully think about what you are expecting AMC to do before buying all those options, especially the short dated maturities.We won't "derive" it, but volatility is proportional to the square root of time. Hence a 1% move in the underlying is basically 16% implied volatility (regular TME readers know this by now). Most AMC traders are not volatility traders, but volatility matters still.The July expiry, slightly more than a month out, has ATM priced at approx 280% implied vol. Buying that option and hedging it dynamically, you need approx 17.5% daily moves in order to finance your theta (280/16=17.5).This is extreme. Add to this the fact skew is trading inverted, upside is more expensive than downside and you get why so many people will end up in tears eventually.AMC doesn't even have to move lower from here for vols to start falling. All those new call buyers could easily end up burning options premium even if AMC moved small higher as vols are extreme. Recall, do not confuse direction with pace.The question is if AMC will face the fate of Tesla's mania a few months ago and the implosion of options value as theta and "fundamentals" eventually kick in?