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MGM Resorts Bulls Gamble on Additional Upside

MGM call volume is easily outpacing put volume in today's session

by 10/19/2012 1:54 PM
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Sentiment toward MGM Resorts International (NYSE:MGM - 11.04) among option players has tended toward the bearish side of the aisle. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), the stock's 10-day put/call volume ratio of 1.03 ranks in the 93rd percentile of its annual range. In other words, puts have been bought to open over calls at a near annual-high clip in recent weeks.

In today's session, however, speculators are instead focusing their attention on MGM calls, as opposed to puts. Call volume is running at more than four times its average intraday pace, with approximately 19,000 contracts changing hands. By contrast, around 3,900 put contracts have crossed the tape, on par for the day.

Traders have honed in on the in-the-money December 10-strike call, which has so far emerged as the most active option on the day. Of the roughly 9,200 contracts traded, 96% have crossed at the ask price, and volume is outstripping open interest, making it safe to assume that new positions are being opened here today. By initiating these long calls, speculators expect MGM to extend its perch above the $10 mark through December expiration. Specifically, they will begin to profit with each step above $11.39 (the strike plus the volume-weighted average price of $1.39) MGM takes over the next nine weeks.

On a technical basis, MGM has been all over the charts. Despite outperforming the broader S&P 500 Index (SPX) by more than 13 percentage points during the past 60 sessions, the stock is sitting on a modest 5.8% year-to-date gain. Additionally, the equity is staring up at its 200-day moving average. This psychologically significant trendline quickly rejected MGM's mid-September rally attempt.

Given MGM's sporadic chart showing, there are a couple of fundamental factors that could be encouraging today's call volume. For starters, MGM jumped more than 2.3% yesterday on news the Macau government gave the casino concern the go-ahead to develop a luxury resort and casino in the region's gambling district of Cotai. Plus, MGM is scheduled to unveil its third-quarter earnings results before the market opens on Wednesday, Oct. 31. The company has bested bottom-line expectations in three of its last four quarters. Analysts are calling for a loss of 17 cents per share.

The stock is following the broad market lower in today's session, though, and was last seen down 1.2% to hover near $11.04.


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