NRG, MGM, LOW Options — Unusual Trading Activity — June 29, 2012

| June 29, 2012 | 0 Comments

Unusual Trading VolumeThis week we’re going back to take a look at some very unusual options trading activity in NRG Energy (NRG), MGM Resorts (MGM), and Lowe’s (LOW).

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:

NRG Energy Options (NRG)

Options in mega power producer NRG Energy (NRG) showed huge option activity Monday afternoon.

In fact, call options outnumbered put options in this name by nearly 20 to 1.

While the company has been beaten down with other coal and energy names, there’s at least one option trader that’s drawing a line in the sand.

NRG Energy was poised to finish the trading session down about 1.2% at $14.53 when it happened…

In a single print, one option trader came in and slapped down $116,000 on 2,000 contracts of the NRG August $15 strike call options.

Over the last few trading days, option traders have been slowly nibbling at this option strike.  But today, this trader clearly stepped in big.

Don’t forget, straight call buying without any other options is a strategy that’s used when traders believe a stock is going to see a significant rise in value.

And he’s not alone…

It looks like more investors are getting bullish on the Energy sector by the day. 

If you don’t already know, NRG is an independent power producer.  The company has more than 25.5 gigawatts of generation in three countries, with most of it in the US.  It’s also one of the largest retail energy providers in the US with more than 2 million customers.

NRG’s renewable assets in the US are primarily concentrated in the Northeast, Texas, and California.  In 2006, they purchased 10,900-megawatt power generator Texas Genco for $8.3 billion.

But, we can’t look at a company like NRG without looking at everything else it has going for it.

For one, ultra-low-cost coal and nuclear power plants produce two thirds of NRG’s generation.  And the company has expanded its coal-fired margins by retrofitting these plants to burn Powder River Basin coal.   

This increases their margins exponentially!

In addition, NRG owns highly valuable wholesale generation assets.  These include 1,400 megawatts of in-city generation in New York City as well as low-cost coal and nuclear plants in power-hungry Texas. 

Important assets to be sure… as they bring in a good portion of NRG Energy’s yearly revenue.

Lastly, regardless of natural gas price levels, NRG will benefit from any uptick in economic activity and power use.

With the Energy sector having been beaten down so badly, I think a turnaround is coming in the very near future.  And it looks like this option trader agrees.

And as we’ve heard many times before, option traders usually have their fingers firmly on the pulse of the market.  Now could be the perfect time to jump in.

MGM Resorts Options (MGM)

Options in gambling company MGM Resorts (MGM) lit up our screens at the end of Tuesday 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.

Lowe’s Options (LOW)

Options in home-improvement company Lowe’s (LOW) are showing quite a bit of activity today (Thursday).

Despite all three major indices trading down today, Lowe’s is having an even tougher day.

While the S&P 500 is currently posting a 1.3% decline, Lowe’s is down over 1.6% to $26.85. 

Investor sentiment turned negative on May 3rd, right before Lowe’s cut their full year profit guidance.  Since then, Lowe’s has seen a 14% decline.

Now, it’s obvious that traders and investors alike are still nervous about a potential global economic slowdown.

And this morning, one trader bet a small house on it! 

During mid-morning trading, this trader stepped in and purchased 2,500 put contracts at an average price of $0.46 a piece.

He’s obviously seeing LOW’s chart breaking down. So, he’s probably worried the stock’s on the verge of collapsing even further.

By spending a hefty $115,000 on puts, this option trader clearly believes LOW is heading lower over the next several weeks.

And as you know, purchasing put options without an offsetting trade offers unlimited upside potential.  If this trader’s right, he stands to make a serious amount of money.

So, what about this company?

If you don’t already know, Lowe’s is the second largest home-improvement retailer in the world.  They operate an impressive 1,747 stores throughout the US, Canada, and Mexico.

Lowe’s offers products and services for home decorating, maintenance, repair, and remodeling.  And they target retail do-it-yourself, retail do-it-for-me, and commercial business customers.

But, the question remains, what’s going on with this usually strong name?  

First, with the domestic store base maturing, the pace of new store openings has slowed dramatically.  And slower new store growth may be beginning to drive increased competitive pricing pressures between Lowe’s and top competitor, Home Depot (HD). 

In my opinion, Home Depot will come out the winner of this head-to-head competition.

In addition, weak consumer spending, coupled with the inability to tap home equity lines of credit, could delay many retail home-improvement projects.  And that obviously hurts Lowe’s future sales.

Lastly, Home Depot has greater profit margin upside.  As they restructure and complete the supply chain, HD could really pressure LOW’s returns.  Especially since Lowe’s has no such restructuring plan in progress.

And while this will probably be good for the average consumer, it’s not going to bode well for LOW.

This happens to still be a good company in my book over the longer term, however, for the short term, option traders obviously disagree!

What do you think?

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!

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Category: Unusual Options Trading Activity

About the Author ()

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank of New York.