Bulls Bet on a Move Higher for MGM Resorts International

Schaeffer's Investment Research
  FEB 20, 2013 3:03 PM

MGM's March 14 call is seeing buy-to-open activity today.

 


Option players are targeting MGM Resorts International (NYSE:MGM) in today's session, following the casino concern's early morning turn in the earnings confessional. Both calls and puts are trading at accelerated levels, but it's the bullishly slanted contracts that have emerged as the options of choice. By the numbers, roughly 17,000 calls crossed the tape as of 12:16 p.m. ET, compared to around 11,000 puts.

MGM's March 14 call is the most active strike so far, where nearly 9,200 contracts have changed hands. The majority of these have traded at the ask price, and data from the International Securities Exchange (ISE) indicates that a number of these positions were bought to open.

By purchasing these out-of-the-money calls, traders expect MGM to finish above the $14 mark by the sound of the closing bell on Friday, March 15, at which point front-month options will expire. Specifically, breakeven for these near-term calls is $14.13 (strike plus the volume-weighted average price of $0.13), meaning the stock must rise 9.7% above present levels over the next three-and-a-half weeks in order for the options to be profitable. Delta for the calls is currently listed at 0.17, or 17%, suggesting a less than 1-in-5 chance the contracts will finish in the money by expiration.

Expanding the sentiment scope reveals that calls have been favored over puts in MGM's options pits in recent weeks. At the ISE, Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), traders have scooped up nearly six calls for every put throughout the past 10 sessions. This call/put volume ratio of 5.61 ranks higher than 87% of other such readings taken during the last 52 weeks, pointing to a healthier-than-usual appetite for bullish bets over bearish of late.

Echoing this call-skewed trend is the equity's Schaeffer's put/call open interest ratio (SOIR) of 0.81. Not only does this show that call open interest outweighs put open interest among options with a shelf-life of three months or less, but it ranks in the lowest percentile of its annual range. In other words, short-term speculators are more call-heavy now than at any other time during the past year.

Technically, the stock has performed well in recent months. In addition to outpacing the broader S&P 500 Index (INDEXSP:.INX) by more than 17 percentage points over the last 60 sessions, the equity is up nearly 41% from its mid-November low of $9.15.

This upward momentum is continuing in today's session, after a special dividend announcement for its China division has effectively overshadowed a worse-than-expected fourth-quarter earnings report. At last check, the stock had tacked on 1.1% to hover near $12.88.

This article by Karee Venema was originally published on Schaeffer's Investment Research.

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