News that a major institutional investor could boost its stake in MGM Resorts International
(NYSE:MGM) not only pushed the stock higher Thursday, but also created a huge flurry of activity on the option markets. Calls traded at nearly seven times their normal levels with 72,000 contracts changing hands, and puts traded at nearly eight times what's typically seen, with 60,000 contracts crossing the tape.
Of particular interest was the March 13.50 call, which saw a good portion of its volume trade at the ask price. Open interest spiked at this strike overnight -- indicating that at least some of these contracts were bought to open, even though this call expires at the end of today's trading. With a volume-weighted average price (VWAP) of $0.10, MGM shares need to reach $13.60 by the closing bell tonight for the trades to be profitable. Anything short of the strike price puts the traders out the initial premium paid, but that's all they are risking. The breakeven price is a 4.7% jump from current levels, although MGM almost touched that point yesterday during its big jump, hitting $13.50 in intraday activity.
In fact, MGM climbed 6.8% yesterday after it was announced that Tracinda Corp., owned by noted investor Kirk Kerkorian, is considering upping its stake in MGM to 25% from its current level of 18.6%. Overall, MGM is up 11.6% on the year, although it is still climbing back out of a summer slump.
Option traders have been bearish on MGM lately. The equity's 50-day put/call volume ratio on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) stands at 0.56, a relatively low number that still ranks in the top 17% of readings taken in the last year. Simply stated, traders have been buying to open puts at an accelerated clip during the past 10 weeks.
This article by James Pilcher was originally published on Schaeffer's Investment Research.
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