Betting Against the House at MGM

04/28/2009 11:26 am EST

Focus: OPTIONS

Elizabeth Harrow

Financial Analyst, Schaeffer's Investment Research, Inc.

Elizabeth Harrow of Schaeffer’s Investment Research says option players are making a bear run at the troubled casino operator, and that doesn’t bode well for the stock.

MGM Mirage (NYSE: MGM) was targeted last Friday by bearish option players. During the course of the session, traders on the International Securities Exchange (ISE) bought to open 3,431 puts on MGM, compared to just 456 calls. The equity's single-day put/call volume ratio of 7.52 indicates that bearish bets were nearly eight times more popular than their bullish counterparts last Friday.

The bulk of the day's put volume was focused on the June 2.50 strike, where 2,890 contracts crossed the tape on open interest of 17,178. Also active was the May 5.00 put, where 1,066 contracts changed hands on open interest of 9,445.

Due to the popularity of puts last Friday, MGM's Schaeffer's put/call open interest ratio (SOIR) ticked higher over the weekend. The indicator arrived Monday at 0.82, which ranks higher than 31% of comparable readings taken during the past year. This SOIR seems to reveal a generally upbeat mood among short-term option players; however, it's not unusual to see a bias toward calls when a stock is trading at MGM's depressed levels.

Indeed, the recent trend on the ISE has been toward calls. During the past ten days, speculative investors on this exchange have purchased an average of 1.37 calls for every put on MGM. This ratio arrives in the 59th annual percentile, indicating a slight preference for bullish bets.

Short sellers, on the other hand, have recently ramped up their bets on the equity's decline. Short interest on MGM jumped by 8% during the most recent reporting period, and now accounts for a hefty 33% of the stock's available float.

A quick glance at MGM's price action reveals why bearish bets are enjoying a sudden spike in popularity. The shares have shed [90]% of their value during the past 52 weeks, and they've underperformed the broader Standard & Poor’s 500 Index by [around 30] percentage points during the past 60 trading days. 

Currently, the stock is sandwiched between its ten- and 20-week moving averages. Together, these intermediate-term trend lines have pressured MGM lower since November 2007. In the intervening months, the equity has managed just one weekly finish above these resistance levels.

The shares also are battling resistance from their 80-day moving average, which has applied pressure to MGM since late 2007. This trend line rebuffed the stock's rally attempts in September 2008 and January 2009, and is currently looming directly overhead.

In short, the stock is staring down multiple layers of stubborn technical resistance. (Indeed, the security shed more than 9% in Monday's trading, closing at around $5.50—Editor.)
 
Overall, it looks as though the recent influx of put buying was influenced directly by the equity's weak price action. As bears continue to bet against MGM, the stock's long-term down trend could accelerate.

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