MGM Resorts Stock Options Accelerate on Earnings Meltdown

by Alex Eppstein | Feb 16, 2017
Casino operator MGM Resorts International (NYSE:MGM) is getting crushed on a disappointing earnings report, and earlier reached its biggest intraday percentage deficit in a year. With the stock down 9% at $26.94, options traders are on high alert -- sending intraday volume to 10 times the usual rate, and into annual-high territory. Based on Trade-Alert data, one speculator is taking a cautiously bullish approach toward MGM shares.

Specifically, Trade-Alert indicates the options trader bought to open 4,500 June 28 calls for $1.66 apiece, while simultaneously selling to open matching blocks of June 32 calls ($0.40 each) and June 24 puts ($0.57 each). By selling the two lots, the speculator reduced her entry price to $0.69 per three-way spread, or a total of $310,500 (net debit * 4,500 contracts * 100 shares per contract).

The options trader will begin to profit if MGM rallies north of $28.69 (long call strike plus premium paid) by June expiration. However, if the shares settle below $28 at expiration, she will sacrifice the entirety of the initial premium paid. Worst of all, should the stock sink below the deep out-of-the-money put strike, the speculator would be vulnerable to even heavier losses.

Today's penchant for call trading is business as usual for MGM. The stock sports a Schaeffer's put/call open interest ratio (SOIR) of 0.38, just 6 percentage points shy of a 12-month low. In fact, of the 10 strikes to see the biggest increases in open interest during the past two weeks, all but two land on the call side of the aisle.

Returning to the charts, today obviously represents a severe setback for MGM Resorts International (NYSE:MGM), with the shares almost certain to close below its 120-day moving average for the first time since last March. However, the stock remains a long-term outperformer, having gained 34% on a year-over-year basis.

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