(Bloomberg) — After weeks of profiting from the stock and debt of AMC Entertainment Holdings Inc., hedge fund Mudrick Capital Management ended up with a 5.4% loss after a derivatives bet went haywire.

The fund, which specializes in distressed debt, suffered the losses on AMC after day traders pushed the movie theater’s shares up as much as 127% on a single day, derailing call options Mudrick had sold on AMC shares to hedge exposure to the company, according to a person with knowledge of the matter. The Wall Street Journal earlier reported on the losses.

Up until the improbable surge in AMC’s shares, the firm founded by Jason Mudrick had been among the big winners on AMC securities after the hedge fund agreed to help keep the cinema chain afloat last year by committing to buy new debt issued by the company. That and other AMC positions helped the fund reap almost $200 million in gains in January, Bloomberg News previously reported. Then the firm bought about $230 million of new shares from the company in a deal announced June 1, shares it quickly flipped to day traders and other AMC enthusiasts for another profit.

But that’s when things started to unravel.

To protect the firm’s holdings from a market plunge, Mudrick sold call options that gave other investors the right to buy shares from him at pre-set levels — most of which were at $40 or more — well above any price at which the shares had ever traded.

As AMC’s stock surged June 2 in its Reddit-fueled frenzy, the price suddenly blasted past the prices at which the fund’s counterparties could cash in on the call options, the person said. The hedges ended up losing 10%, causing the net loss of 5.4%.

A representative for Mudrick declined to comment.

Shedding Risk

Mudrick no longer has exposure to AMC after unwinding all of its debt, stock and derivatives bets. The firm is still up between 12% and 14% for the year, the person said.

A risk committee for Mudrick Capital met virtually on the night of June 1 and decided to exit all debt and derivative positions the following day, the person said. Mudrick sold about a third of its exposure before the stock surged even further on June 2 and was fully out by that afternoon. The firm sold its 15% first-lien bonds in the theater chain for 121 cents on the dollar, the person added.

Story continues

But the trade’s unwind didn’t come soon enough. AMC shares surged past $40 to reach as high as $72.62, blowing up the firm’s short position and effectively unraveling what had looked like a winning bet.

AMC shares have soared more than 2,200% this year, and debt holders have also benefited from the rally. The company’s bonds due 2026 that were trading as low as 5 cents on the dollar in November now change hands above face value, according to Trace.

While ultimately handing Mudrick a loss, the meme stock frenzy helped AMC earn a credit upgrade from S&P Global Ratings after the company was able to raise hundreds of millions of dollars from share sales.

Mudrick’s flagship fund rose about 12% in 2020, making much of its money in the fourth quarter of last year, Bloomberg previously reported. The firm manages around $3.5 billion.

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