AMC Stock Is Out of Whack With APE Shares. Jim Chanos Is Taking Advantage.

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Legendary stock bear Jim Chanos has an arbitrage idea for investors as well as meme traders following

AMC Entertainment
.

One side of the trade—a short position in the movie-theater company that Chanos discussed in a television interview on Tuesday—should be no surprise. Chanos, who is credited with uncovering some of the accounting issues that led to Enron’s bankruptcy in 2001, is known for finding stocks that are due to drop.

AMC shares seem an apt target for short sellers. The company isn’t making money and its roughly $10 billion market capitalization is larger than it was before the pandemic devastated the movie business in 2020.

But Chanos isn’t just short AMC stock. He also holds AMC preferred equity units— preferred stock that began trading this week under the symbol “APE.”

The APE units, distributed as a dividend to holders of AMC common stock, are meant to have the same economic and voting interest as the regular stock. Yet the two assets are selling for very different prices even though they are essentially equivalent.

APE shares started out trading for about $7. They traded down to about $5.22 on Tuesday, while AMC stock remained at about $11.

That price gap, and the potential for it to shrink, is what attracted Chanos’s interest. His firm didn’t respond to a request for comment about the trade or its risks.

The main dangers appear to be liquidity and timing. The APE shares don’t trade as much as AMC stock, so unloading a lot of APE could move the price significantly. That would make it hard to take advantage if the price of APE shares moves close to that of regular AMC stock. What is more, a short seller of AMC stock could have to close out their position for a variety of reasons. The price to do that could be far from where APE units are trading.

Still, if an investor, or trader, has the stomach, capital, and patience to execute the arbitrage, the APE/AMC gap should theoretically close over time. On Wednesday, AMC stock was at about $9.50, while APE units were at about $7.30. The current gap is $2.20, representing a couple of bucks of profit available at a low but nonzero risk.

Why AMC even issued the APE units is a good question. It seems to be a nod to meme traders and the movie Rise of the Planet of the Apes. Ape trading loosely refers to the idea that if individuals band together, they are strong enough to burn short sellers—market players that sell borrowed stock, hoping to buy it back later at a lower price.

The stronger-together strategy seems to have worked in the recent past. Meme traders focusing on companies such as

GameStop

(GME) have cause some epic short squeezes in recent years.

A squeeze is what happens when short sellers are forced to cover positions—possibly to limit growing losses—leading to price spikes in the underlying stock that aren’t easily explained by company fundamentals.

Back in March, for instance, about 20% of the shares available for trading in AMC were borrowed and sold short. That is roughly 10 times the average short interest in an

S&P 500
stock. Short sellers rushing to cover might have been part of the reason shares raced to about $21 a share from $8 over a two-week span during that month.

Connor Smith contributed to this article.