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Short squeeze looms for AMC as stock borrowing rates soar

Short squeeze looms for AMC as stock borrowing rates soar

Days after the judge denied a settlement in a shareholder lawsuit against AMC Entertainment (NYSE: AMC), which would have allowed it to convert its AMC Preferred Equity (APE) units and proceed with a 10-for-1 reverse stock split, the AMC stock borrowing rates have skyrocketed, substantially increasing the chance of a short squeeze.

Indeed, the borrowing cost for the stock of the American movie theater chain opened Wednesday, April 12, at almost 1,000%, according to the relevant data shared on Twitter by fiduciary and investment advisor Kevin Malone on the same day.

AMC borrowing cost. Source: Kevin Malone

Notably, these borrow rates are reported to be at all-time highs (ATHs) for AMC stock, even higher than those recorded in January 2023, according to the chart and data shared by the pseudonymous Twitter account unusual_whales on April 14.

AMC borrow rates chart. Source: unusual_whales

‘Perfect squeeze score’

Meanwhile, finance analytics platform S3 Partners, which tracks data on short selling, has recently identified AMC as one of the 18 stocks with perfect ‘squeeze scores’ of 100, as Barron’s reported on April 13, citing Ihor Dusaniwsky, S3’s managing director of predictive analytics.

According to Dusaniwsky, the “Squeeze Score overlays the significant components for a squeeze, higher financing costs, and unrealized losses.” In this context, unrealized losses on short positions and higher financing costs make it costlier to hold onto the borrowed stocks, adding to the risk that traders will want to exit their bets.

In the case of AMC, Barron’s Al Root further explained:

“It costs about 238% annually to borrow AMC shares, according to S3. That means that a short seller who borrowed $100 of AMC stock and sold it short would have to pay the owner roughly $300 if they kept that position for a full year.”

Indeed, a high squeeze score indicates the possibility that a stock price will soar higher, signaling danger for short sellers, who might go into a frenzy trying to close their positions and buy back the stock, driving the price up even faster.

In other words, a short squeeze can create a significant amount of money in a relatively short period but may also result in huge losses as the increased demand for shares attracts more buyers, driving the stock higher and leading to more short-sellers trying to cover their positions.

As things stand, the AMC stock is currently changing hands at the price of $5.46, up 2.25% on the day, with a previous close at $5.34 and a daily range between $5.66 and $5.39, as per recent data retrieved by Finbold.

Disclaimer: The content on this site should not be considered investment advice. Investing is speculative. When investing, your capital is at risk.

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