MGM Resorts International Earnings Preview: 2 Trades for MGM Stock

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MGM Resorts International (MGM) will release its second-quarter earnings figures ahead of the open next Tuesday, but MGM stock is already in rally mode. Reports hit the Street yesterday that MGM is considering selling The Mirage casino to Starwood Capital for between $1 billion and $1.5 billion.

Reacting to the news, traders sent MGM stock soaring nearly 8% on Thursday, but can the shares hold this perch with earnings arriving next week?

Looking at the numbers, expectations aren’t very rosy for MGM’s second-quarter report. In fact, Wall Street is looking for earnings to plunge by half year-over-year, down to 11 cents per share. Revenue, meanwhile, is seen dipping roughly 8% to $2.38 billion.

Despite the poor comparisons with fiscal 2014, analysts remain quite bullish on MGM’s prospects. For instance, 17 of the 20 analysts following MGM rate the stock a “buy” or better, with three “holds” and nary a “sell” rating to be found. Furthermore, the 12-month price target of $25 represents premium of 27% to Thursday’s post-rally close.

MGM Is on Rough Terrain

But MGM’s sentiment backdrop isn’t all roses. Short sellers pushed the number of MGM shares sold short higher by 4% during the most recent reporting period, resulting in short interest of 23.8 million shares.  Representing 8.3% of MGM’s total float, this short position could provide short-covering fuel if the company confirms the sale of The Mirage or reports strong second-quarter earnings figures.

Turning to the options pits, either short sellers are quite concerned about a potential post-earnings rally or MGM options traders are heavily bullish on the shares. Currently, the August put/call open interest ratio rests at an bullish reading of 0.58. Closing in on just the weekly August 7 series (i.e. the options most affected by next week’s earnings), the put/call open interest ratio plunges to 0.21, with calls nearly quintupling puts among options set to expire at the end of next week.

MGM 7-31-2015
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Overall, the weekly August 7 series implieds are pricing in a potential post earnings move of about 8.2%. This places the upper bound at $21.09, while the lower bound lies at $17.91.

The upper bound lies north of the round-number $20 level as well as MGM’s 200-day moving average — a trendline the stock has not closed above since late April. The lower bound, meanwhile, rests above MGM’s recent lows and technical support near $17.50.

2 Trades for MGM Stock

Put Spread: Prior to Thursday’s rally I would have been inclined to side with the bulls on MGM ahead of earnings. Now the shares are trading in overbought territory, leaving them vulnerable to a selloff if The Mirage reports don’t pan out or if earnings leave behind a sour taste for traders.

With this backdrop, an August $18/$20 bear put spread has quite a bit of potential. Before the close of trading on Friday, this spread was offered at 77 cents, or $77 per pair of contracts. Breakeven lies at $19.23, while a maximum profit of $1.23, or $123 per pair of contracts, is possible if MGM closes at or below $18 when August options expire.

Straddle: On the other hand, there is plenty of volatility leveled at MGM at the moment, creating potential for a straddle play. A straddle involves the simultaneous purchase of an at-the-money call and an at-the-money put, and allows the trader to take advantage of a large move in the underlying stock regardless of the direction.

As of this writing, the MGM August 19.50 straddle was offered at $1.95, or $195 per pair of contracts. Breakeven for this trade lies at $21.45 on the upside and at $17.55 on the downside.

As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/07/mgm-resorts-international-earnings-preview/.

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