Melco Crown Entertainment Bulls Shrug Off Casino Slide

Melco Crown Entertainment Ltd (ADR) (MPEL) traders gamble on long-term upside

by Griffin Kruse

Published on Apr 14, 2015 at 2:47 PM
Updated on Jun 24, 2020 at 12:30 PM

Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) is following its sector peers lower -- down 4.9% at $22.65 -- as traders react to a a cool-down for Hong Kong stocks and bearish analyst forecasts for Macau casinos. In fact, Bernstein expects April gaming revenue in the gambling enclave to drop more than 40% year-over-year in April. Nevertheless, call activity in the options pits is ramping up, with some traders gambling on long-term upside for MPEL.

Drilling down, calls are changing hands at three times their average intraday rate, and are outpacing puts by an over 4-to-1 margin. The day's most active contract by a landslide is the January 2016 27.66-strike call, where buy-to-open activity has been detected. Digging deeper, a block of 10,000 contracts accounts for nearly all of the action at the strike. By purchasing this call for $1.60, the trader expects the shares of MPEL to muscle their way above $29.26 (strike price plus premium paid) by the close on Friday, Jan. 16, 2016, when the contract expires.

Heading into today's session, MPEL was attempting to stage a recovery, with the shares up 11% from their March 16 two-year low of $20.40. However, from a longer-term perspective, the stock has spent more than a year marking a series of lower highs and lows.

Daily Chart of MPEL Since April 2014

Put activity has been more prominent than usual in the options pits, as MPEL's 10-day International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE) and NASDAQ OMX PHLX (PHLX) put/call volume ratio of 0.53 stands higher than three-fourths of all equivalent readings from the past year. Echoing this indicator is the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.81, which is in the 78th percentile of its annual range. Simply stated, short-term traders are more put-heavy than they normally have been over the last 12 months.

Elsewhere, the brokerage bunch is mostly bullish on Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL). Specifically, 58% of covering analysts rate MPEL a "buy" or "strong buy," with only one "sell" rating to be found. What's more, MPEL's consensus 12-month price target of $27.95 represents a 23.4% premium to current trading levels -- and is just $0.29 above today's most popular call strike.


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