by Tyler Craig | November 16, 2012 11:16 am
Lady Luck has delivered for shareholders of Penn National Gaming (NASDAQ:PENN); the casino and race track operator is soaring more than 34% on monster volume after releasing breakup plans to create a casino-based REIT. But shrewd options players can make good bets on other names in the space — it’s not too late to cash in on this news.
Other casino-related stocks are seeing a favorable boost this morning as well. Las Vegas Sands (NYSE:LVS) was up as much as 5.9%, while Wynn Resorts (NASDAQ:WYNN) jumped over 4.5%. Perhaps not surprisingly, the up-gaps in both names were quickly faded as traders took advantage of the opportunity to sell these recently beaten-down stocks at higher prices. The movement in both names today followed the classic “gap ‘n’ crap” reaction.
The ability for the PENN’s fellow casino cohorts to maintain their instant gains was probably stymied by two factors. First, they’re all in short-term downtrends with plenty of overhead supply. Second, the weakness in the broader market has made it downright difficult for most stocks to stage sustainable advances.
Click to EnlargeTraders who believe today’s sympathy pop in PENN’s peers is built on a house of cards may consider bearish plays on LVS to exploit the resumption of its current downtrend in the coming weeks. The current level of implied volatility favors selling options over buying; implied volatility is sitting toward the upper end of its four-month range. It’s also important to structure a limited risk position so that in the off chance LVS does experience some type of PENN-like move higher, your losses will be capped.
Traders could enter a December 45-48 bear call spread for $0.50 by selling the Dec 45 call and buying the Dec 48 call. The max reward is limited to the initial $0.50 credit and will be captured as long as LVS remains below $45. The max risk is limited to the distance between strike prices (48-45), minus the initial credit ($0.50), for a total of $2.50. To incur the max loss LVS would have to rise above $48 by December expiration.
As of this writing Tyler Craig had no positions in any of the aforementioned securities.
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