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Option Activity Alert: Traders Take a Gamble on MGM Mirage

It looks like short sellers are hedging with calls in light of the stock's recent rally

by 1/12/2010 12:45:46 PM
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Calls were the options of choice yesterday on MGM Mirage (MGM: View sentiment for MGMsentiment, chart, options). During the course of Monday's trading, speculators on the International Securities Exchange (ISE) bought to open 5,607 calls on the gaming issue, compared to just 368 puts. The stock's single-day call/put volume ratio arrived at an optimistically skewed 15.24, confirming a strong bias toward calls over puts.

MGM SOIRThe trend toward calls is nothing new for MGM, though. The equity's 10-day ISE call/put volume ratio checks in at 4.02, as speculators have bought to open more than four calls for every put during the past two weeks. This ratio ranks higher than 81.6% of other such readings taken during the past year, indicating that option players are purchasing bullish bets at a faster pace than usual.

As a result of all this upbeat speculation, MGM's Schaeffer's put/call open interest ratio (SOIR) has pulled back to its lowest level in months. The stock's SOIR now stands at 0.77, with calls comfortably outnumbering puts among options set to expire within three months. This ratio ranks in the 24th annual percentile, suggesting that short-term option traders have been more bullishly aligned only 24% of the time.

In today's session, the trend toward calls continues. MGM's most active strike so far is the January 2010 12.50 call, where 7,761 contracts have crossed the tape. The majority of these calls have traded at the ask price, suggesting they were purchased, and implied volatility on this front-month option is up 2% at last check. This indicates that new long calls are being added at this strike today.

MGM short interest However, not all of the stock's fans are buying calls. In today's session, one trader has opted to initiate a short put spread using MGM's March 10 and 12 puts. These options traded several large symmetrical blocks shortly before 10:30 a.m., with the 10-strike puts trading near the ask price, and the 12-strike puts crossing the tape at the bid price. In other words, the lower-strike puts were purchased, and the higher-strike puts were sold.

Currently, those 12-strike puts are right at the money. By opening this neutral-to-bullish spread, the speculator is looking for MGM to hold steady above $12 per share through March expiration. In this scenario, all of the options will expire worthless, allowing the trader to retain the initial net credit as the maximum potential profit. Meanwhile, the downside risk on this put-sell position is limited by the purchase of the 10-strike put.

However, there is a major caveat to the current trend toward call buying on MGM. Short interest rose by more than 10% during the most recent reporting period, and now accounts for a healthy 13.6% of the stock's float. In light of this data point, it's highly likely that some of the buy-to-open call volume on MGM is being driven by short sellers looking to hedge their pessimistic stock positions.

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