An Option Play for This Casino Operator

03/24/2010 12:01 am EST


Beth Gaston Moon

, Schaeffer's Investment Research, Inc.

Las Vegas Sands (LVS) shares had a wild ride early this week, rallying almost 10% to take out intermediate-term technical resistance and hit a new 52-week high. Broad strength in the casino operator helped spark buying power, as did a positive move from Bernstein, which upped its 12-month price target in LVS to 24 from 22, maintaining an “outperform” rating as well.

Yesterday’s sharp rally inspired call buyers, who took on a variety of aggressive plays in the newly front-month series. But let’s first look at the stock’s technical breakout. The shares rallied through the 21 level yesterday, a region that previously rebuffed the stock’s advances in September and again in January. In fact, LVS hasn’t spent much time above the level since October 2008. Technical analysts now hope that LVS will find downside support at this former bulwark of resistance.

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During the first hour of Monday’s session, when the stock was trading only modestly higher at the 20 mark, we saw one investor sell 4,000 June 16 puts for 66 cents each, collecting premium of $264,000. By the end of the day, LVS had moved from $20 to $21.43 and the puts were offered at 55 cents. Had this investor wanted to, he could have bought these to close for $220,000, keeping the $44,000 difference as profit—not bad for a day’s work!

Later in the session, three front-month options were notably active as a slew of small blocks rushed across the tape in three different options. First, the in-the-money April 21 call saw more than 37,000 contracts trade on open interest of less than 10,000. The April 22.50 call (slightly out of the money) saw about 24,000 contracts trade versus open interest of 5,790. And finally, the out-of-the-money April 24 call saw 9,200 contracts trade on open interest of 1,712. If these were in fact buyers across the board, they were increasingly aggressive, paying more (an average of 82 cents) for the closer-to-the-money calls and less (24 cents or so) for the 24-strike calls. Overall, 184,000 contracts traded in LVS yesterday, compared to average daily volume of 50,000 in 2010. The majority of this volume hit the tape on the call side. Long call buyers can lose 100% of the money they put in, but can enjoy unlimited gains once the stock rallies through breakeven.

Those investors who believe LVS may continue to run higher in the near term (or at least not move much lower from current levels) might consider a cash-secured put at the May 20 strike. At Monday’s close, this put could be sold for about $1.33. This premium can be pocketed if LVS is trading at or above 20 when these options expire. If LVS breaches the 20 level and you are assigned on the puts and have to buy the shares, you can fulfill your obligation of buying 100 shares of LVS (per contract) for a bit of a discount at $18.67 (the strike price minus the credit collected).

By Beth Gaston Moon, contributor,

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