Casino Stock Bears Could Double Their Money in 10 Days

Scientific Games stock is facing off against a familar bearish trendline

by Patrick Martin

Published on Jul 3, 2019 at 11:29 AM

A month ago, we profiled Scientific Games Corp (NASDAQ:SGMS) and a flashing bearish signal. Following that June 4 write-up, the stock went on to slide more than 13% into its June 24 low close at $18.08. SGMS shares have since bounced back from those lows -- but heading into the Fourth of July holiday, another short-term sell signal is rearing its head, indicating it may be time to bet on the casino stock's next leg lower.

More specifically, the equity is running into resistance at its 40-day moving average, after a lengthy stretch below it. There have been five similar run-ups to this moving average in the last three years, after which SGMS stock was lower 10 days later by 11%, on average, per data from Schaeffer's Senior Quantitative Analyst Rocky White, with 100% of the returns negative.

At last check, Scientific Games stock was trading at $19.82, so another "average" pullback from this trendline resistance over the next two weeks would put the stock around $17.64 -- just south of its lows from May and June.

SGMS Stock Chart

Another pullback would certainly have SGMS short sellers cheering. The 10.46 million shares sold short account for a healthy 19.3% of the stock's total available float, and 7.4 times the average daily trading volume. A technical rejection could encourage more of these bears to pile on, potentially creating additional headwinds.

Now is an opportune time to use put options to leverage a short-term slide in SGMS stock. The equity's Schaeffer's Volatility Index (SVI) of 51% is in the 4th percentile of its annual range, suggesting short-term options are pricing in relatively low volatility expectations for the underperformer.

In fact, if the SVI holds steady around its two-year average over the next couple of weeks, White's modeling shows that an at-the-money SGMS put option could potentially return 138% on another expected retreat from resistance at the 80-day moving average. In other words, prospective put buyers could more than double their money on a roughly 11% drop in the shares.

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