Option players exploited pre-earnings premiums to wager on Las Vegas Sands Corp.
(NYSE:LVS) this morning, with speculators selling both calls and puts. Just hours ahead of its earnings release, the casino concern has seen roughly 18,000 calls and 13,000 puts change hands as of 11:00 a.m. EST, more than twice its average intraday volume.
On the call side, traders have honed in on the out-of-the-money February 52.50 strike, which has seen nearly 7,400 contracts cross the tape. Almost two-thirds of the calls have crossed at the bid price, and implied volatility was last seen more than 5 percentage points higher, hinting at sell-to-open action.
By writing the calls to open, the sellers expect LVS to remain south of $52.50 through the closing bell on Friday, February 15, when front-month options expire. In this best-case scenario, the calls will expire worthless, allowing the sellers to retain the entire premium received at initiation. However, with earnings just over the horizon, this is a rather risky play. Should LVS surmount the $52.50 level, the sellers could be forced to deliver shares of LVS for $52.50 each -- a discount to what they'd go for on the Street.
As alluded to earlier, it's not difficult to see why option sellers are striking while the pre-earnings iron is hot. Amid escalating demand for front-month options, the stock's Schaeffer's Volatility Index (SVI) has skyrocketed to 44% -- above 64% of all other readings of the past year. In other words, LVS' February-dated options are relatively expensive right now, which is a boon for option writers.
On the put side, premium sellers are using time decay to their advantage. As of 11:00 a.m. EST, the weekly 2/1 50-strike put has seen north of 1,500 contracts cross the tape -- mostly at the bid price. Plus, volume has exceeded open interest at the strike, confirming our suspicions of new initiations.
By selling the puts to open, the traders expect LVS to remain atop the $50 level through the end of the week, when the options expire. In this instance, the puts will remain out of the money, and the sellers can retain the initial premium collected. Again, though, this strategy isn't without risk. Should LVS breach the $50 level after tonight's earnings release, the sellers could have to buy the shares at the strike -- a premium to what they'd pay on the Street.
At last check, the shares of LVS are up 1% to wink at the $51.58 level, but are still poised to close a second session south of their 10-day and 20-day moving averages. From a slightly longer-term perspective, the equity has spent most of 2013 dawdling between support at $51 and resistance in the $53-$54 neighborhood, though the aforementioned trendlines -- hovering in the $52 region -- could emerge as added resistance.
Historically, LVS fell short of analysts' per-share profit projections in each of the past two quarters, according to Thomson Reuters.
This article by Andrea Kramer was originally published on Schaeffer's Investment Research.
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