Redbox Entertainment (RDBX) stock soars again as retail remains stubborn and shorts become scarce

At first glance, this looks like a great deal for Chicken Soup for the Soul Entertainment (CSSE). It has agreed to buy Redbox Entertainment (RDBX) for 0.087 of CSSE stock. At the current closing price of CSSE stock, that implies a price of about $0.51. If it is such a great deal though, why is CSSE stock continuing to fall?

CSSE stock dropped 12% on Monday, 18% on Tuesday, and 5% on Thursday? Chicken Soup has agreed to take on Redbox's considerable debt pile of nearly $325 million. Meanwhile, Redbox stock has remained highly elevated. The reason? A likely massive short squeeze that was very well orchestrated by retail traders seems to be the culprit. These traders identified an overly shorted stock with a small market cap, meaning outsized moves were possible. 

Redbox Stock News: Shorts are not possible, so now what?

Given the reported huge percentage of RDBX already shorted, it was a classic short squeeze candidate. Reportedly, the short percentage had ballooned to over 200%. Certainly, your author has not been able to borrow any stock to short, so I have had to look to other strategies to take a bearish position. Retail may be in this for the short-term pop, but I am looking for the medium-term drop. A case can be made for both. 

Redbox is a legacy retail DVD business that operates via kiosks throughout the US. Clearly then its time has passed, and few of us own DVD players let alone rent DVDs when streaming has totally obliterated the DVD rental market. Redbox (RDBX) was on life support before Chicken Soup stepped in. I still cannot work out why they want to pay so much for the deal. They are not putting up cash but are assuming Redbox's significant debt pile, currently at $325 million. It also seems highly unlikely that Redbox or the merged entity will be able to meet coming debt obligations. The junk bond market is currently in a near-no-bid state with yields surging and issuance collapsing. Last week it was widely reported that mortgage-backed securities went no bid. Companies with high debt loads will face punitive refinancing options. 

The timing is key here. With no stock being available to borrow, shorting is not an option. Buying this is not for me due to the massive concerns over the business model. At current prices, Redbox is worth $700 million. With current volatility exploding, selling call options can be profitable as you are benefitting from selling the crazy high volatility as well as taking a bearish bet on the underlying. However, selling options is massively risky and can expose you to unlimited losses, so we would not recommend this. Buying puts is the safer option even if you are paying high prices for volatility.

For those of you who prefer the shorter-term buy and squeeze strategy, this is continuing to work well. Be on the lookout for when sentiment changes though, since a sharp reversal is likely. This has happened to all pandemic short squeezes. Classic signs to watch out for are when the stock becomes available to borrow from your broker, when the premarket gains fail to hold in the regular session, when there is a drop in volume or other risk assets turn lower. Always manage your risk and have some exit strategy or stop in place.

Redbox stock forecast

This is not a stock for technical analysis. A pure short squeeze play, RDBX is likely to come to an end even with or without the merger deal going ahead.

RDBX stock chart, daily

The author is short OTM calls and long OTM puts in Redbox (RDBX).