Beware the Ides of February for Caesars Stock

CZR's Icahn-related rally could stall in the face of a historically bearish trendline intersection

Jan 11, 2019 at 1:29 PM
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The shares of Caesars Entertainment Corporation (NASDAQ:CZR) are higher this afternoon, amid reports that activist investor Carl Icahn is building a stake in the casino concern. Against this backdrop, options traders are flocking to CZR to speculate on more upside -- but a technical alarm is sounding for the shares, which has historically had bearish implications.

Caesars stock is up 7.6% to trade at $8.59 today, on pace for a sixth straight win -- its longest win streak since mid-September. In fact, the equity has rebounded about 47% since touching a two-year low of $5.83 on Dec. 24.

However, CZR is back within one standard deviation of its 70-day moving average, after a lengthy stretch below this trendline. In the past two years, there have been four similar run-ups to this moving average, according to Schaeffer's Senior Quantitative Analyst Rocky White, the last occurring in October, after M&A hopes were dashed. After those signals, CZR went on to average a one-month loss of 8.42%, and was higher a month later just once. If past is prologue, the equity could give up the bulk of today's gains by mid-February.

CZR stock chart jan 11

As alluded to earlier, Caesars is attracting notable options activity amid the Icahn buzz. So far today, about 45,000 calls have changed hands -- four times the average intraday pace -- compared to around 7,437 puts. Most of the action has transpired at the weekly 1/25 9-strike call, where a block of roughly 8,600 contracts traded around the ask price at midday, suggesting they were bought. If the speculator bought the calls to open, they're expecting CZR to muscle north of $9 by the close on Friday, Jan. 25, when the options expire.

Today's appetite for calls merely echoes the recent trend, though. At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have bought to open nearly 14 CZR calls for every put in the past two weeks. This ratio is in the 69th percentile of its annual range, pointing to a slightly greater-than-usual affinity for bullish bets of late.

However, some of those recent calls -- particularly at out-of-the-money strikes -- may have been purchased by short sellers seeking a hedge against the CZR bounce. Short interest represents a whopping two-thirds of the equity's total available float, or about a week's worth of pent-up buying demand, at the stock's average daily volume.


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