"Shot Themselves In The Foot" - AMC 'Messiah' Mudrick Battered By Bad Options Bet

On June 1st, Mudrick Capital went from hero to zero in the eyes of Reddit's Wall Street Bets rebels as the hedge fund scooped up $230 million in newly issued stock at an above market price ($27.12), prompting Redditors to herald the fund as the company's savior and sparking a bullish move in the stock - now that the firm was (marginally) better capitalized.

In our view, this is not mindless dilution, but rather this is very smart raising of cash so that we can grow this company... to many of you on Twitter, to grow YOUR company. Watch out naysayers, $AMC is going to play on offense again. Here we come! {5 of 5}

— Adam Aron (@CEOAdam) June 1, 2021

Just a few short hours later, a Bloomberg headline knocked the firm off their ivory tower to the moon as Redditors described them as “losers,” “scum bags” and “a large waving pile of s—t with no future," after the fund exited all of their equity position at $32 (a heroic trade making over $40 million in hours that upset the buy-and-hold frenzied WSB crowd). One Reddit post summed up their attitude to the fund's quick profit... “Mudrick didn’t stab AMC in the back…They shot themselves in the foot.”

That is where the story ended for many...

But now, as The Wall Street Journal reports, things didn't work out quite as well as Mudrick hoped and Redditors will get some schadenfreude payback...

It turns out that inside Mudrick, executives were growing apprehensive and the firm’s risk committee met on the evening of June 1 and decided to exit all debt and derivative positions the following day (only the cash equity position had been exited prior).

However, as WSJ notes, that was one day too late.

Jason Mudrick

As it happens that among that set of derivatives positions, Mr. Mudrick had sold call options on AMC stock, producing immediate income to offset some potential losses if the theater chain did face problems (or as some might say 'picking up pennies in front a steamroller'). The derivatives gave buyers the option to buy AMC shares from Mudrick Capital for about $40 (viewed as a seeming improbability when the stock was trading below $10).

In overnight trading, AMC started to accelerate above $40... and within minutes of the open the next day had screamed up above $70 - sparking a massive surge in the price of those 'sold' call options, leaving Mudrick with a major loss...

The loss on the sold options, it turns out, was big enough to not only erase the gains, it left the previously heroic-looking trader looking like the biggest loser.

WSJ reports that Mudrick Capital made a 5% return on the debt it sold but after accounting for its options trade, the fund took a net loss of about 5.4% on AMC.

Mr. Mudrick’s fund is still up about 12% for the year, one of the people said. Meanwhile, investors who bought AMC stock at the start of the year and held on have gained about 2000%.

We can only imagine the reaction the WSB crowd once they find out about this.

Tyler Durden