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Over the course of the past five sessions, Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) option players at the International Securities Exchange (ISE) have shown a distinct preference for calls over puts. Specifically, 4,884 calls have been bought to open, compared to just 30 puts, resulting in a bullishly skewed call/put volume ratio of 162.80.
Widening the scope to include data from the Chicago Board Options Exchange (CBOE) and NASDAQ OMX PHLX (PHLX) -- and expanding the time frame to two weeks -- yields a similarly optimistic stance. In fact, the equity's 10-day ISE/CBOE/PHLX call/put volume ratio of 6.59 (up from its month-ago reading of 0.46) ranks in the 80th percentile of its annual range. Simply stated, calls have been bought to open over puts with more rapidity just 20% of the time within the past year.
This glass-half-full mindset has spilled outside of the options arena, as well. For starters, short interest plunged 22% in the latest reporting period, and now accounts for a low 1.2% of the stock's available float. Not only was MPEL unable to capitalize on this burst of buying power (the equity is down 11% from March 17), but -- at current levels -- there is little in the way of available sideline cash to help fuel any future rally attempts.
Additionally, 11 out of 12 analysts maintain a "strong buy" recommendation for the equity, with the sole "dissenter" awarding the stock with a "buy" rating. Plus, the consensus 12-month price target of $49.60 stands at a stiff 34% premium to MPEL's present price of $37.14, as well as in territory yet to be charted by the stock.
Looking at the charts reveals MPEL's price action doesn't warrant such bullish speculation. As touched upon, the equity has struggled over the past month or so, in spite of all of the short-covering activity. However, this sell-off started weeks before, after MPEL topped out at a record peak of $45.70 on March 5, and since hitting that notable mark, the stock has shed 19%. More recently, the equity's two rally attempts in April were quickly contained by MPEL's descending 32-day moving average -- a trendline that previously served as support in February.
From a contrarian perspective, such bullish sentiment surrounding an underperforming stock could have bearish implications going forward. In other words, an unwinding of the optimism toward MPEL both in and out of the options arena could translate into headwinds for the stock down the road.
What's more, the casino operator is scheduled to report earnings on Thursday, May 8. Despite exceeding consensus bottom-line estimates in six of the past eight quarters, the stock has gone on to shed an average of 0.5% and 1.4% in the subsequent day and week, respectively. For its first quarter, the expectation is for Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) to bank a 41-cent per-share profit -- a nearly 71% improvement over year-ago results.