Monday, April 26, 2010

Betting on Casinos

Amidst the market tear and bear boot stompin', one area exhibiting recent relative strength versus the broader markets is the gaming and casino industry. The likes of MGM, LVS, and WYNN are up from 15-30% over the last month alone. While I can't speak much to the fundamentals of these high rollers, it's tough not to like their recent price action (click image to enlarge).

The Options Action gang concocted a bullish option strategy to exploit a continued rise in MGM stock. The play consisted of a short Jun 15 put and a long Jun 17.5- 20 call spread. After buying the call spread for $60 and receiving $110 for the short put, the trader would be left with $50 credit at trade inception.

That $50 represents the minimum profit potential if MGM remains above $15 by Jun expiration. The ideal scenario is for MGM to rise above $17.50 so the call spread will start to move in-the-money. The maximum profit zone comes into play over $20 at expiration.

[Source: MachTrader]

One variation to the suggested trade worth considering is simply selling the naked put and avoiding the call spread. Though the call spread increases your delta exposure and grants larger profits if MGM rises above $17.50 by expiration, it does reduce the overall net credit received. At the end of the day, there are numerous ways traders can construct bullish option positions. The key is to ensure one is comfortable with the risk-reward and pay off structure.

For related posts readers can check out:
Options Action
Delicious AAPL
Bull Call Spreads

4 comments:

Anonymous said...

tyler ... your suggested trade seems complicated when you can achieve much the same result by either ... selling a 17.5 strike put ... or a couple of 15/17.5 put spreads [and limiting the risk] ... unless there is some secret sauce in the split strike combo that I missed? .. cheers, James

Tyler Craig said...

Great observations James. The purpose of most my posts highlighting plays suggested from Options Action is typically to shed additional insight and throw in my two cents on the trade. I agree there are probably simpler ways to structure bullish plays. I don't believe there's any major advantage over the short put, call spread combo versus your suggested short ITM put.

Regards

Chris said...

Hey Tyler,
I thought I'd share a kinda long story having to do with Casinos and the market. Last week I was in Las Vegas helping with an intro market class and I had an interesting experience to say the least. One thing I often do when explaining the importance of understanding emotion in the market, is relate to the time when the book written on how to beat the house at blackjack first came out. This book gave you an an analytical way of playing to puts the odds in your favor. When the book was first published, casinos went crazy, many pulled the game from the floor. The reason the game is still on the floor today, is because of human emotion. The casinos that kept the games noticed they were making more money from blackjack than before. The idea that gamblers had the advantage drove more traffic to the tables. What was happening was the gambler would soon find himself either getting greedy or scared and they would divert from the original set of rules. The same is true in the market. Traders often learn tools and charts that "Better their odds", but emotion can't be present. While in Vegas, I just so happen to test this strategy... a coworker and myself ventured out to a few casinos. I played my hands according to "The Book" and turned $40 into $800. anyways.. random story, thought it was somewhat relevant... maybe i just wanted to gloat a bit about my winnings. haha.

Tyler Craig said...

Well said. It's one thing to possess a trading plan, it's another thing to possess the discipline to follow the plan.