Las Vegas Sands Corp. (LVS: sentiment, chart, options) is expected to report a first-quarter loss of 2 cents per share after the close tonight. Earnings reports can spur large moves in a security if a company matches or misses these expectations. Such is the case for LVS, as options traders are piling into both puts and calls on this gaming concern.
Overall, call volume has outpaced LVS' daily average by nearly seven to one, with more than 24,800 contracts changing hands. Meanwhile, put volume has almost tripled the norm, as some 43,000 contracts have traded so far. The most popular call is the May 11 strike, with about 13,000 contracts trading, while the most popular put, the May 10 strike, has seen nearly 10,000 contracts change hands.
Zeroing in on these most active strikes, I uncovered what appears to be the initiation of a strangle position on LVS heading into the company's earnings report. Specifically, a block of 3,500 LVS May 11 calls traded at 9:49 a.m. Eastern time for the ask price of $0.75. At the same time, a block of 3,500 LVS May 10 puts traded at the ask price of $0.75. By implementing this strategy, the trader needs LVS to move sharply following the event; direction doesn't matter.
For those not familiar with this options strategy, a strangle is the simultaneous purchase or sale of an equal number of puts and calls on a given underlying stock with the same expiration date but different strike prices. The strangle purchaser is looking for a large move by the stock; one that exceeds either strike level by more than the amount of the premium paid for both options.
The Anatomy of a Las Vegas Sands Strangle
Drilling down on today's LVS strangle, the trader purchased 3,500 May 11 calls for $262,500 -- ($0.75 * 100)*3,500 = $262,500. At the same time, the trader also purchased 3,500 May 10 puts for $262,500 -- ($0.75 * 100)*3,500 = $262,500. The total outlay for this position would be $525,000 -- $262,500 + $262,500 = $525,000.
There are two ways of determining the maximum profit on a strangle position. If LVS jumps higher, then the maximum profit is theoretically unlimited, as there is no cap to how high the shares can rally. If LVS plunges, the maximum profit is limited to the purchased put strike minus the total debit paid. For this position, the maximum profit from a downside move is $8.50, or $850 per contract.
There are two breakeven points for this position. They are calculated by adding the net debit paid to the purchased call, and subtracting the net debit paid from the purchased put. For the example, the breakevens are $12.50 -- 11 + 1.50 = $12.50 -- on the upside, and $8.50 -- 10 - 1.50 = 8.50 -- on the downside. Finally, the maximum loss is limited to the net debit paid upon entering the position. Below is a chart for a rough visual representation:
Implied Volatility
Traders should not be afraid of rising implied volatility following the initiation of a strangle position. An increase in implieds increases the value of the purchased options, allowing the trader to collect a higher return by selling (to close) the position. Currently, implieds for the LVS May 11 call arrive at 96%, while the implied volatility for the May 10 put rests at 308%. For comparison, the stock's one-month historical volatility arrives at 147.65%, meaning that the May 11 call option is relatively inexpensive, while the May 10 put could be considered very expensive.
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