Options Trade Targets Statistical Oddity in AMC and Cinemark (CNK) Stocks

Business Insider

2 days ago

While it's never pleasant to discuss flailing industries, it's safe to say that the box office is undergoing a dramatic — and painful — paradigm shift. It really comes down to the signs of the times. With shopping malls fading into obscurity across America, the cineplex operators that once provided a marquee anchor are likewise struggling.
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To be fair, both AMC Entertainment (AMC) and Cinemark Holdings (CNK) have worked wonders to stay afloat in an increasingly competitive environment for the content entertainment industry. Unfortunately, the stats don't look particularly inviting.
According to BoxOfficeMojo, the U.S. box office last year grossed $8.57 billion. A decade prior, the total gross was nearly $10.37 billion. And ten years before that, the figure was a very respectable $9.35 billion. In other words, the trend is rather flat and refusing to move in the right direction — and that's probably not something that either AMC or Cinemark can fix by themselves.
Frankly, the nature of entertainment has changed. People have so many choices these days, and there's no reason to spend so much money when a similar experience (albeit on a much smaller scale) could be had for much less. Still, from a quantitative perspective, there's one ticker among the cineplex giants that could be intriguing.
Establishing the Statistical Framework for AMC and CNK
In the past few months, I've shifted my forecasting methodology from traditional fundamental and technical analysis to 'discrete-event' analysis, focusing on statistical and quantitative modeling of recent events. The main difference between the two is that the latter promotes epistemological continuity, where the input and output variables reside in the same domain of reality.
Such continuity is especially critical when assessing different securities, even if they're positioned in the same industry, as is the case with AMC Entertainment and Cinemark. Under traditional methodologies, the primary measurement metrics are continuous scalar signals, meaning that they're unbounded. However, the inconsistency arises when discrete labels — such as 'good price' or 'bad earnings' — are directly extracted from these unbounded signals.
Ultimately, what really matters is whether the market is a net buyer or a net seller. From this universal principle, we can compare multiple stocks on the same epistemological grounds.
In the case of AMC stock, in the past 10 weeks, the market voted to buy the security four times and sell six times. During this period, the security experienced a downward trajectory. For brevity, we can label this sequence as 4-6-D.
Before we get into the trading setup, let's consider the baseline odds of AMC stock. On any given week, the chance that a long position will rise is only 43.06%, meaning that AMC suffers from a worrying negative bias. So, the mission is simple: any bullish setup must be able to beat the baseline or else there would be no point.
Unfortunately, this is the problem for AMC stock. Because it's flashing a 4-6-D sequence, the chance that it will see upside in the following week is only 38.46%. The caveat is that it's possible that AMC could see a considerable spike upward over the next two weeks. However, in both the positive and negative scenarios, AMC is likely to tumble based on past analogs. Empirically, I see too much risk here, which is why I can't wholeheartedly endorse the idea.
CNK Stock May Offer a Temporary Reprieve
Interestingly, CNK stock has also printed the same 4-6-D sequence as AMC: four up weeks, six down weeks, negative trajectory. While both securities present high risks due to the fading relevance of the box office, Cinemark is a different animal. Therefore, if you had to pick between the two, CNK makes for a superior empirical argument.
As a baseline, the chance that a long position in CNK stock will rise on any given week is 51.16%. That's nothing to write home about, but it is an upward bias. This also puts some pressure on the bulls because any trading setup must beat the baseline on paper.
Thankfully for the bulls, when the 4-6-D sequence flashes, there's a 58.7% chance that the following week's price action results in upside, with a median return of 3.87%. With CNK stock closing at $25.62 on Friday, there's a possibility that it could reach $26.61. Of course, if the market gods smile on Cinemark, CNK could in theory reach $27 due to the psychological effect of whole numbers.
Unfortunately, Cinemark cannot escape the fundamental flaws of its industry. Based on past analogs, CNK stock is looking at a gradual deflation of its equity value. Subsequently, there appears to be only one rational trade available: the 25/27 bull call spread expiring September 19th.
The above transaction involves buying the $25 call and simultaneously selling the $27 call, for a net debit paid of $105 (the maximum possible loss). Should CNK stock rise through the short strike price of $27 at expiration, the maximum profit is $95, a payout of over 90%. Here, the breakeven price is $26.05, so CNK doesn't need to hit $27 on September 19th to be at least somewhat profitable.
Is CNK a Buy, Sell, or Hold?
Turning to Wall Street, CNK stock carries a Strong Buy consensus rating based on eight Buys, one Hold, and zero Sell ratings over the past three months. CNK's average stock price target is $34.44, implying 32% upside potential over the next twelve months.
Why CNK Stock is the Best House in the Worst Block
The movie theater industry has faced years of decline, with no clear fundamental turnaround on the horizon. Both AMC Entertainment and Cinemark remain high-risk plays. That said, if forced to choose between the two, CNK stock looks like the slightly better option. Viewed through the same analytical lens, Cinemark edges out AMC—though only by a narrow margin.