Bet On Red for LVS With a Long Put Strategy

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Even before Friday’s jobs report, Investors were busy placing wagers on green. One venue not participating in the favored and optimistic action was Las Vegas Sands Corp. (NYSE:LVS), where a “bet on red and option to sell below the line” still looks to be the stronger position.

lasvegassands185Bargain-hunting following Federal Reserve Chief Janet Yellen’s unappreciated remarks of “quite high” equity market valuations, lower oil and a bounce in treasuries failed to register for shares of LVS, which finished flat despite the likes of the S&P 500 ETF Trust (NYSEARCA:SPY) tacking on 0.40%.

One reason behind the relative pressure in LVS — fellow Macau resort operator Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) became the fourth of four listed companies doing business at the notorious gambling mecca to announce weaker-than-expected numbers.

Prior to Thursday morning’s profit and sales miss by Melco Crown, Las Vegas Sands, Wynn Resorts, Limited (NASDAQ:WYNN) and MGM Resorts International (NYSE:MGM) put together a trifecta of weak hands in coming up short at the corporate confessional this earnings season.

LVS Daily Chart

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Is the worst behind for investors wanting to place a bet on green i.e. higher prices, in the likes of LVS? A modest gain in shares of MPEL on Thursday could lead one to believe that’s the case. But looking at the chart in LVS stock and the contrarian wager doesn’t add up as a value bet to this strategist.

In fact, with shares of LVS off about 9.3% this year and compared to the SPY’s gainer of around 3%, the technical interpretation is an already weak 2015 is setting up even lower prices in LVS.

Visually and of concern is a slightly flawed head-and-shoulders continuation pattern that’s been developing this year.

The first area of support based on a neckline and the formation lows set back in December, comes in around $50. That said, I don’t expect much of a fight from bulls in holding this area, should it get tested in the coming weeks.

With the pattern showing numerous bearish gaps, centered at 62% Fibonacci support and built below long-term 200-day simple moving average, a measured move calculation below the neckline works out to an estimated price target of $40 for LVS.

LVS Long Put Strategy

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The volatility chart provided for LVS suggests to us buying a put and being long time premium for a bearish directional bet holds a modest amount of house edge. Implieds are actually lower than underlying LVS stock volatility, which is favorable. At the same time, premiums are stuck in a middle-of-the-road trading range.

One wager of interest is the out-of-money Sep $47.50 put for $2.25 and what I referred to earlier as a “bet on red and option to sell below the line.”

There’s plenty of time in this contract so decay isn’t yet an issue. And if shares of LVS crack below the $50 technical neckline and go on to hit our price target of $40 by September, the put would be worth $7.50 at expiration for a return of more than 230%.

Implieds on the long premium bet could always drop lower as they did last summer in LVS stock. However, I don’t anticipate a drop in broader market implieds back to those multi-year lows, so I’d gander there’s only modest volatility risk and more likely, a benefit from owning premium.

Based on our technical observations, using money management and a stop loss of less than 8% at $56 seems practical. Were shares of LVS to reverse higher, that level will have reclaimed the 50-day moving average and 62% retracement level. Exiting there would also cut the max loss by 30% to 50% if that hand were forced sometime in the next month.

As of this writing, investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon his observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT

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The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.


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