MGM Resorts Options (MGM): Unusual Trading Activity
Options in gambling company MGM Resorts (MGM) lit up our screens at the end of yesterday with an enormous block trade on the bullish side.
From the look of this trade, one option investor might be getting a little ahead of himself on the future of casino gaming. Nevertheless, he’s taken up a very large and speculative bet that a turnaround could be on the horizon.
What’s going on?
After its last earnings report, MGM rose above $14 a share. But the rally didn’t last long. The stock soon plummeted with the overall market down to just over $10 a share.
I think this trader is expecting a similar situation in August when MGM is scheduled to report again. And with that in mind, he’s getting in now while option premiums are still low.
So, the trade…
A few minutes before the closing bell yesterday, our tracking system picked up a block trade of 10,000 MGM August $14 call options. They traded at an average price of just $0.08 a piece.
This put his cost on the equivalent of 1,000,000 shares of stock at a mere $80,000.
Even though I consider this a lottery ticket, I believe it’s an inexpensive trade based on his thesis!
What’s more, with no other offsetting option position, this trader could wind up pocketing an unlimited amount of money on his $80,000.
But what’s so special about MGM?
If you don’t already know, MGM Resorts is the largest gaming and hotel company on the Las Vegas Strip. They have approximately 40,000 guest rooms and suites, representing about 30% of all guest rooms on the market.
And they own a lot more than just the MGM Resort.
Their other properties include the Bellagio, Mandalay Bay, Mirage, Luxor, and New York-New York. What’s more, MGM has a 50% ownership stake in the new $9.2 billion City Center.
The Strip revenue accounts for approximately 80% of MGM’s revenue. The rest comes in from their new casino resort in Macau, China.
Now, getting back to today’s unusual call buying…
As I said earlier, a trader is trying to take advantage of an expected large increase in MGM’s stock following their next earnings report. He also probably believes a few other factors will act as positive catalysts for the shares.
First off, MGM is well-positioned to benefit from a strong rebound in the Las Vegas Strip gaming and lodging market. The ongoing recovery could certainly help MGM beat analyst estimates for the second quarter.
Also, increased revenue would enable the company to leverage its significant fixed costs and substantially increase EBITDA margins. Another potential contributor to a higher stock price.
Lastly, even though many economists think a slowdown in China is worse than it appears, I don’t think investors are giving MGM enough credit for its fast-growing MGM China division. Gambling revenues for the six casino operators in Macau hit $3.3 billion in May, the second highest monthly total on record.
Bottom line…
MGM has a lot going for it. And while I believe this large call position may be a stretch, I like it and wouldn’t hesitate to put on the same trade.
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Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
