MGM, WFC, T Options — Unusual Trading Activity — July 27, 2012
This week we’re going back to take a look at some very unusual options trading activity in MGM Resorts (MGM), Wells Fargo (WGC), and AT&T (T).
As many of you know, unusual options volume can be a valuable indicator as to what traders are thinking, and more importantly, where these stocks are heading in the short-term.
This is something professional options traders pay a lot of attention to, and for good reason…
Unusual options activity can “tip off” big moves in a stock, either up or down.
So let’s take a look at some ‘interesting’ activity that caught our eye this week:
MGM Resorts Options (MGM)
Options in gambling company MGM Resorts (MGM) lit up our screens before the closing bell last Friday.
It wasn’t more than a month ago when a trader came in and bought 10,000 August $14 call options on MGM.
Now the bulls are at it again.
On Friday, we noticed another huge purchase of call options on MGM. I’ll get into the details in just a moment.
But first, a few words about the stock’s performance…
After its last earnings report, MGM rose above $14 a share. But the rally didn’t last long. The stock has since plunged with the overall market down to around $9.75 a share.
However, MGM rebounded sharply during the middle part of last week. I think this bullish market action is what sparked last week’s long term bet on this casino operator.
So, getting back to the trade…
A few minutes before the closing bell yesterday, our tracking system picked up a block trade in MGM call options. A trader snapped up 11,250 MGM January 2014 $17 calls at $0.63 a piece.
The critical point here is that the entire transaction was completed in a single print. In other words, the calls were all purchased at the same time.
There can be no doubt this trader is very bullish on MGM.
Now, even though I consider this trade as nothing more than a lottery ticket, I believe it’s a bet worth taking. You see, it’s an inexpensive trade with huge upside potential!
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 MGM owns 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 pair of 50% ownership stakes in the new $9.2 billion City Center and the $1.25 billion MGM Macau casino resort in Macau, China.
Now, getting back to today’s unusual call buying…
As I said earlier, this trader is trying to take advantage of expected increases in MGM’s stock following the next six earnings reports. 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 stretch, I like it and wouldn’t hesitate to put on the same trade.
Wells Fargo Options (WFC)
Options in mega bank Wells Fargo (WFC) showed heavy activity Tuesday right after the Federal Reserve hinted at the possibility of more monetary easing.
You see, although WFC reported earnings recently, option traders seem to still be enamored with the banking sector. Especially with the thought of another round of government easing.
And as we saw yesterday, the mere hint of government intervention turned the market around. Most important, the turnaround was lead by financials.
Government intervention is like Christmas for option traders because banks will be able to borrow at even lower costs. And at least one trader started to take advantage of this possible rumor in a big way.
So, why Wells Fargo?
I believe this to be the result of pure technicals.
Wells Fargo has been in a very defined trading range. In the first few months of 2012, WFC traded between $30 and $32 a share. Then in March it spiked, before settling into its current range between $33 and $34 a share.
Right now, WFC is trading in the middle of the range at $33.20.
And one option trader clearly sees WFC heading higher soon.
During the last hour of trading, our tracking system detected a single block trader selling 18,700 WFC August $31 strike put options at an average price of $0.20.
Meaning, this trader is looking for WFC to be above $31 a share at expiration in mid-August. If he’s correct, he will pocket the $374,000 in premium collected on the trade.
But why the hype on this name?
Wells Fargo is one of the four largest banks in the United States. At the end of 2011, they had $1.3 trillion in assets.
The company is split into several segments: community banking, wholesale banking, wealth management, brokerage, and retirement. They’re also a major player in the residential mortgage market, servicing $1.8 trillion in loans.
Although we’re seeing huge option activity mainly because of the technicals coupled with possible government monetary easing, there are some other reasons this stock could be poised higher…
Recently, Wells Fargo announced a quarterly dividend increase from $0.12 to $0.22 per share. And some analysts think WFC may raise its quarterly dividend again to $0.35 per share by the end of 2013.
No question about it, investors love high dividend yielding stocks right now!
In addition, analysts also predict WFC’s earnings power is likely to improve in the near term. They see this happening as credit quality improves, interest rates start to climb, and the company continues to cut costs.
Either way, as long as WFC remains in its trading range, option traders will be very happy.
AT&T Options (T)
Options in telecommunications company AT&T (T) showed large options activity Wednesday as the S&P started to give back morning gains.
AT&T bounced Tuesday after falling with its earnings report in the previous session. And one trader’s betting a floor has been established for the shares.
During Wednesday’s trading session, our tracking system detected a trader come in and sell 20,000 T September $35 strike put options for $0.70 a piece.
The premium collected from the trade totaled an impressive $1,400,000.
Obviously, this put seller is betting T will hold that $35 strike price through September expiration. And if it does, money will be pouring in!
But before we break down this trade, let’s first take a closer look at AT&T…
As most of you know, AT&T is the second-largest US wireless carrier. It serves over 89 million customers and 12 million “connected devices” such as e-readers.
AT&T is also the dominant local phone company in 22 states, serving about 40 million phone lines, 16 million internet users, and 4 million television customers.
In addition, it provides phone and data services – such as Web hosting and data transport – to large businesses nationwide.
So, what’s going on with this trade?
I think a large institution or hedge fund is banking on T holding up in a tough market.
Let’s not forget, AT&T has direct access to, and established relationships with, millions of residential and business customers.
In addition, the company’s high-speed internet service customer base is the largest of any provider in the US. And it’s a loyal customer base as around half of these subscribers are also residential phone customers.
Finally, AT&T’s network upgrade plans will enable them to offer more services and improve the quality of those services. This should help drive revenue growth without consuming loads of capital.
Bottom line…
T looks strong right now, and it seems that option traders believe it will remain strong in almost any market.
More Options Ideas…
That wraps up this week’s unusual options trading and volume…
Keep in mind, there’s a lot more unusual options activity going on than what we discuss here.
We just try to bring you what we feel are the most significant ones– and the ones you might actually be able to make some money on!
So keep an eye on your email inbox… we have a lot more options trading ideas coming your way!
***Editor’s Note*** Our colleague and friend over at Hyperion Financial just released a new penny stock recommendation that I had to tell you about. Even though it’s not ours, it’s a great penny stock that has a TON of potential. To get it, just sign up for their Penny Speculator newsletter. Details here.
Safe Trading,
Marcus Haber
Category: Unusual Options Trading Activity
