Casino gaming concern Caesars Entertainment Corp (NASDAQ:CZR) is to release its fiscal fourth-quarter earnings report after the close of trading on Monday next week. The outlook for the debt-laden company doesn’t look good, though the recent movement of the bankruptcy case for its Caesars Entertainment Operating Co. unit to Chicago holds some promise — at least as far as bankruptcy cases go.
For the record, the company is expected to post a fourth-quarter loss of $2.04 per share, on average. There is currently no whisper number for Caesars’ earnings.
Historically, the company has posted poor fundamental performance, missing the Wall Street consensus in each of the past four reporting periods by an average of 91%.
Likely due to debt and earnings concerns, Caesars is followed by very few brokerage firms. According to data from Thomson/First Call, CZR stock has attracted one “hold” rating, three “sells,” and no “buy” ratings. Additionally, the 12-month price-target of $9.50 represents a 21.5% discount to the stock’s current perch at $11.54.
Short sellers are also getting in on the bearish action. As of the most recent reporting period, more than 15 million shares of CZR stock were sold short. This wealth of short interest accounts for a whopping 43% of the stock’s total float — or shares available for public trading — creating the potential for a sizeable short-covering rally should Caesars offer up any positive data in its quarterly report.
Turning to the options front, it’s clear that short sellers are feeling the pinch. Specifically, the March/April put/call open interest ratio for CZR stock rests at a very bullish 0.56, with calls nearly doubling puts among short-term options.
Given CZR’s poor fundamentals and price action, we could assume that many of these call contracts are being used to hedge short positions against a potential rally for CZR stock.
Click to Enlarge Overall, weekly Mar 6 series implieds are pricing in a potentially sizeable post-earnings move of about 17% for CZR stock. This places the upper bound at $13.51, with the lower bound arriving at $9.49.
A plunge could send CZR down into annual low territory, while a rally would leave the shares just shy of their 200-day moving average.
2 Trades for CZR Stock
Call Spread: While risky, there is a lot of potential for a post-earnings rally for CZR stock. A positive report could draw upgrades or price target increase from analysts or spark a significant short-covering rally. Traders looking to take a chance on a bullish CZR stock trade might want to consider the Mar $11/$13.50 bull call spread.
At last check, this spread was offered at 65 cents, or $65 per pair of contracts. Breakeven lies at $11.65, while a maximum profit of $1.35, or $135 per pair of contracts, is possible if CZR closes at or above $13.50 when March options expire.
Furthermore, this trade will realize a double at $12.30 and a triple at $12.95, so set your limit orders accordingly.
Put Spread: On the other hand, due to low premiums on CZR put options, there could be even more potential for profit by betting against CZR heading into earnings. Those traders looking to throw in with the bearish bandwagon might consider a Mar $9/$11.50 bear put spread.
At last check, this spread was offered at 35 cents, or $35 per pair of contracts. Breakeven lies at $11.15, while a maximum profit of $2.15, or $215 per pair of contracts, is possible if CZR stock closes at or below $9 when March options expire.
Finally, this trade will realize a double at $10.80 and a triple at $10.45. With trading sure to be brisk on CZR shares following earnings, setting a limit order ahead of time is certainly advisable.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
