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Option Idea of the Week: MGM Resorts International (MGM)

The bullish crowd's gamble has paid off on MGM shares

by 3/21/2014 10:15:25 AM
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Casino operator MGM Resorts International (NYSE:MGM) has been in rally mode for the past year, more than doubling in value. Earlier this month, the stock tagged the $28.75 level, marking its highest point since September 2008. What's more, the shares are now perched above their 160-month moving average for the first time in more than five years.

The equity has recently consolidated some of its gains, potentially creating an attractive entry point for bulls who want to hop aboard the MGM bandwagon. The consolidation has led the stock to the $26.36 level and headlong into its 40-day moving average, which appears to be providing technical support. In fact, according to Schaeffer's Senior Quantitative Analyst Rocky White, the shares have gained an average of 4.4% in the 21 trading days following a pullback to this trendline.

Daily Chart of MGM Since November 2013 With 40-Day Moving Average

There are still plenty of signs of skepticism on this outperformer, which is encouraging from our contrarian viewpoint. The options crowd has turned notably bearish of late, considering the stock's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) put/call volume ratio has surged from 0.23 at the end of February to 0.93 currently. What's more, the present reading stands at an annual high, meaning long puts have never been in greater demand (relative to long calls) during the past year.

This bearish sentiment is also reflected in MGM's Schaeffer's put/call open interest ratio (SOIR) of 0.98, which ranks higher than 69% of similar readings from the past 12 months. While some of this put speculation could be protective in nature amid the stock's recent gains, a shift in opinion among traditional option bears could bolster the stock's upward momentum.

MGM could also benefit from a change of heart among short sellers. Currently, more than 7% of the stock's float is sold short, laying the groundwork for a modest short-covering rally on any good news.

Fans of MGM Resorts International (NYSE:MGM) who want to gamble on more upside could consider purchasing the in-the-money June 21 call, currently asked at $5.85 per contract.

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