(Bloomberg) -- Meme-stock posterchild AMC Entertainment Holdings Inc.’s strategy to raise cash has placed it in the crosshairs of arbitrage traders who see a golden opportunity to profit from a shake-up in its share structure.

The movie-theater operator, which became a favorite of retail traders during the pandemic, is expected to get investor approval to convert preferred shares — ticker APE — into AMC common stock next month. The one-for-one exchange is part of a broader strategy to raise cash and keep the lights on.

Now the gap between the two assets is notable — and potentially profitable for arbitrage traders. 

The APE units closed at $2.83 on Thursday while shares of AMC ended the day at $6.08. Meaning there’s a price gape of $3.25, something unheard of on Wall Street. AMC climbed 5% at 2:10 p.m. in New York Friday.

“This is by far the most-attractive arbitrage situation out there. You don’t see a hundred percentage plus gross return in six weeks very often on a high probability deal,” said Julian Klymochko, chief executive officer of Accelerate Financial Technologies.

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To capture the spread, investors like Klymochko have been deploying a common strategy in the risk arbitrage world: buy APE units, while seeking to protect the downside risk if the vote collapses, and short AMC shares. But such a strategy comes with a degree of risk.

For one, the cost of borrowing AMC shares to sell them short has soared, posing a challenge to even get in on the trade. Around 22% of AMC shares available for trading are currently sold short, according to S3 Partners data, with the fees to short the stock more than tripling this year.

“If you can get stable borrow, it’s a home run. But that’s the problem,” said Cabot Henderson, who focused on merger arbitrage and special situations at JonesTrading. 

What’s more, the volatile nature of meme stocks — assets that trade at valuations detached from their reality — creates an added layer of complication for the risk arbitrage community, which typically prefers straightforward bets. 

Both securities have attracted individual investors who teamed up through social media platforms like Reddit’s WallStreetBets and Stocktwits with the goal of squeezing short-sellers who profit when stock prices spiral. 

“The real question for arbs is about how to hedge these positions given the potential for a massive short squeeze,” Henderson said. AMC’s common stock has a high “Squeeze Score,” according to S3 data, which ranks the risk an asset could get caught in a short squeeze.

One strategy investors are deploying is to hedge by using a light ratio, shorting less than one AMC for one APE long, while others are employing option strategies on AMC to protect against potentially unlimited losses if investors trigger a short squeeze, he added.

(Updates trading)

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