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Why Gambling on Melco Crown Entertainment Ltd Is a Smart Bet

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With existing operations and two new casinos in development, don't be surprised if Melco's revenue doubles by 2016.

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Melco Crown Entertainment Ltd (ADR) (NYSE:MPEL) is engaged in the gaming and hospitality business. The company focuses on developing and operating casino gaming and entertainment resort facilities centered in the Macau market. The stock surged today after Reuters reported that gambling revenue in Macau rose 13.5% in May from a year earlier. Although this figure is lower than what analysts anticipated, they expect that Macau will continue this trend of growth and will continue to surpass year-over-year figures.

Macau is the only place where people can legally gamble at casinos in China. There are currently plans underway to update Macau's infrastructure, which would increase the number of visitors to the gambling enclave. Among those plans are to build a bridge connecting Hong Kong, Zhuhai, and Macau, shortening the time of travel between these three cities. The bridge is set to become operational in 2016.

If investors want to get in on the excitement surrounding Macau, analysts recommend MPEL as the best choice. Melco is one of the few casinos that has a license to operate in Macau and is constantly developing new facilities, particularly in the Cotai Strip. Melco currently operates two casinos in Macau and is building a third near the Lotus Bridge called Studio City. Melco's City of Dreams is Macau's most successful resort.

Furthermore, Macau is looking to expand into the Philippines as well as other areas in Southeast Asia. Melco has a joint venture to develop a 967-room, 242-table gaming resort that will be completed in 2014; it will be called the Belle Grande Manila Bay, according Reuters. ?

Despite its impressive growth of 85% this past year, Melco continues to be a phenomenal stock with plenty of upside. With existing operations and two new casinos in development, don't be surprised if Melco's revenue doubles by 2016.

Trade: Yesterday a trader sold 9500 MPEL July 22 Puts for $.75?
Risk: $2125 per 1 lot?
Reward: $75 per 1 lot
Breakeven: $2125
Cash Received: $712,500
Today's Price of the Puts: $.40
Trader has Profited: ($.75-$.40 * 9500 * 100)= $332,500

Unusual Option Activity:

We define unusual option activity as large block trades that represent a large percentage of daily option volume. The block trade is considered "unusual" if the option volume is above the average daily volume over the past 22 days. At our firm, we scan and analyze order flow from all of the major options exchanges in order to identify any unusual option activity.

Analyzing unusual order flow gives traders a window into what the positions that large institutional players have. The majority of unusual option activity can be traced back to hedge funds, mutual funds, and other large institutions. Knowing where these institutions are placing their bets can be hugely advantageous for any trader. These institutions have informational and technological advantages that the average trader doesn't have, and the amount of time and analysis that goes into every one of their trades is substantial.

Order flow can however at times be deceiving. One might logically thing that a large block buyer of calls is bullish on the underlying. This is not always the case. Remember that a large number of participants in the equity options market are hedgers. Long calls are a hedge against short stock, and long puts are a hedge against long stock. With this in mind we have developed a seven-step trading plan that helps filter out unusual option activity that will not provide actionable trade setups. It is by using this plan that we are able to identify the most significant unusual options activity trades every day.
No positions in stocks mentioned.
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