Gambling Giant Has Massive Upgrade Potential

Call traders keep doubling down on MGM

Mar 5, 2021 at 8:00 AM
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It’s no secret all casino, resort, and travel-related stocks have suffered in the wake of the nearly year-long Covid-19 pandemic. MGM Resorts International (NYSE:MGM) was no exception, but has found a notable pattern of recovery since hitting an almost 12-year bottom of $5.90 last March. The equity did suffer a brief stall between August and October, but with aid from both the 200-day moving average and $21 level, has managed to partake in a swift recovery. In fact, just earlier this week the gambling giant hit a 12-year peak of $39.91, and now sports a 116% nine-month lead. This could be only the beginning of the revival; the more states that legalize sports gambling, the more prevalent sports books at casino’s will become. In fact, the company just signed a multi-year deal with TopGolf, which hosts its flagship location at MGM’s Grand Hotel in Las Vegas, NV.


As most -- if not all -- of us know by now, a market analyst works to financially and quantitatively evaluate a stock to determine if it best qualifies as a "buy," "sell," or "hold" recommendation. And while brokerage outlook is often worth mentioning, rarely is it seen as a near "flush" situation. However, for MGM Resorts specifically, analysts have remained painstakingly bearish since November, with no fewer than 15 of the analysts following the equity sporting a tepid "hold " or "sell " rating at any given time. To put this in perspective, this pessimistic outlook accounts for 83% of all brokerage firms covering MGM as of Thursday’s trading.


However, not all is looking pessimistic for MGM. In fact, in the options pits there has been a strong preference for calls over the last 10 weeks. This is per MGM's 50-day call/put volume ratio of 2.97 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), which stands higher than 95% of readings from the past 12 months. Echoing this, the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.86 stands higher than just 19% of annual readings. In other words, short-term option players have rarely been more call-biased.

In fact, two of the top four most popular options in Thursday’s trading were the weekly 3/5 38- and 39-strike calls, with more than 1,600 contracts exchanged as early as midday. This suggests options players expect the equity to maintain its current -- and impressive -- price point on the charts through the first week of March.

Now also looks to be the perfect time to purchase premium on MGM options. The stock's Schaeffer's Volatility Index (SVI) of 53% sits in the low 6th annual percentile. Additionally, the security's Schaeffer's Volatility Scorecard (SVS) sits at a relatively high 89 (out of 100), which means MGM Resorts stock has tended to exceed volatility expectations during the past year -- a boon for option buyers.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, February 28.


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