SCOTUS Ruling Sparks Bullish Options Betting on Casino Stocks

BYD and CZR stocks are higher, with call options flying off the shelves

by Andrea Kramer

Published on May 14, 2018 at 11:39 AM

Many casino stocks are on fire today, after a Supreme Court (SCOTUS) ruling cleared a path for the legalization of sports gambling in more states. "Congress can regulate sports gambling directly, but if it elects not to do so, each state is free to act on its own," wrote Justice Samuel Alito. As such, call options are flying off the shelves on Boyd Gaming Corporation (NYSE:BYD) and Caesars Entertainment Corporation (NASDAQ:CZR) stocks today.

BYD Option Bulls Cash In Their Chips

Boyd Gaming stock was last seen 3.6% higher at $36.26, on pace for its highest close since Feb. 20. BYD shares are set to end above recent congestion in the $35-$36 area, too, breaking north of an inverse "head and shoulders" on the charts.

byd stock chart

So far today, roughly 5,600 Boyd calls have changed hands -- five times the average intraday pace. For comparison, fewer than 300 BYD puts have traded thus far. Most active is the now in-the-money May 35 calls, where it looks like some option bulls may be cashing in their chips.

Long calls have been more popular than usual over the past couple of weeks. While BYD options volume tends to run light on an absolute basis, traders have bought to open more than 25 calls for every put during the past 10 days on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio is in the 85th percentile of its annual range, pointing to a healthier-than-usual appetite for bullish bets of late.

Some of that call buying -- particularly at out-of-the-money strikes -- could be attributable to the remaining shorts seeking an options hedge. While short interest dipped 10.4% during the most recent reporting period, these bearish bets still represent more than a week's worth of pent-up buying demand, at Boyd Gaming stock's average pace of trading. That's plenty of fuel for a short squeeze to propel BYD shares even higher.

Caesars Call Volume Pops

Caesars Entertainment stock has rallied 6.1% to trade at $12.63 -- right around its year-to-date breakeven level. The shares are now set to retake their 100-day moving average for the first time since February. This trendline acted as a foothold for CZR shares in late 2017.

CZR stock chart

CZR has already seen roughly 32,000 calls cross the tape -- eight times the norm, and pacing for the 99th percentile of its annual range. Not even 2,000 Caesars puts have traded so far.

The weekly 5/25 13-strike call has accounted for nearly 12,000 of those contracts, and it looks like one trader bought to open 10,000 contracts for $0.40, or $400,000 (premium paid * 100 shares per contract * number of contracts). By purchasing the calls to open, the buyer will profit if CZR stock tops $13.40 (strike plus premium paid) by next Friday's close, when the options expire.

Several short sellers could be feeling the heat after today's SCOTUS ruling, too. Short interest on Caesars stock surged nearly 79% during the past two reporting periods, and now accounts for almost 37% of the equity's total available float. At CZR's average pace of trading, it would take about seven sessions to repurchase these pessimistic positions -- again, plenty of fuel for a short-covering rally.

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