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This morning, I am recommending a bullish trade on Caesars Entertainment Corporation (NASDAQ:CZR).
Last week, I mentioned that my readings were neutral. I also said caution was warranted because of all the different warning signs on the market. The bearish play I recommended on Box, Inc. (NYSE:BOX) was a good way to put some protection in your portfolio, but now I’d like to look at an upside play.
We may need to be defensive while the market is complacent, but part of a defensive strategy is carefully selecting your bullish trades. Let’s look at why CZR is a good target right now.
Disney and Eldorado
In mid-May, CZR and ESPN, which is owned by The Walt Disney Company (NYSE:DIS), reached a deal to bring sports-betting content to fans. Legalized betting on sporting events represents a growth area for companies like CZR, and a partnership with ESPN, one of the most ubiquitous sports entertainment providers, represents a good opportunity.
More recently, Eldorado Resorts (NASDAQ:ERI) targeted CZR for a takeover. Last week, CZR rejected an offer of $10.50 per share as being too low. It looks like the deal is still on, and a takeover would benefit CZR.
Usually, the company being taken over will see its value go up, which would provide a short-term boost for CZR. We’re already starting to see the effects now, and to get a better picture, we should take a look at the daily chart.
Breaking Out of a Downward Channel
Below, we can see that CZR has been in a downward channel since late April. It didn’t help that CZR missed earnings per share estimates at the beginning of May.
Though the company did beat revenue expectations, it reported greater losses per share than expected. May is already a bearish month, and starting with a mixed earnings report set a bad tone.
Daily Chart of Caesars Entertainment Corporation (CZR) — Chart Source: TradingView
But the beginning of a month is usually bullish. Now that June is here, it’s possible that the takeover talks are bringing investors back into CZR. After rejecting ERI’s offer last week, the stock opened higher, breaking out of its downward channel. Investors might expect the takeover to boost the value of the stock above $10.50.
The bullish news around CZR makes it a good target for a cheap, bullish spread. This will let us add some bullish exposure to our portfolios while we wait to see where the market is heading.
Using a spread order, buy to open the CZR July 26th $9 call and sell to open the CZR July 26th $10.50 call for a net debit of about $0.65.
Note: There are several July expirations available for CZR options. Be sure you are opening the weekly options that expire on Friday, July 26, 2019.
About Debit Spreads
A debit spread is simply a way to lower the cost of buying options, as the option that you sell to open (short) helps offset the cost of the option that you buy to open. Therefore, this call debit spread is a way to lower the cost of buying bullish call options. Many brokers will require the use of margin and/or a set amount of reserved capital to execute a debit spread; contact your broker directly for specific requirements.
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Ken Trester is editor of the popular Maximum Options program. Trester has been trading options since the first exchanges opened in 1973 with a winning streak that goes back to 1984 with money-doubling average annual profits since 1990.