It is amazing to see entertainment and travel stocks survive this awful year. 2020 was a disaster year for humans, but it also claimed the lives of millions of businesses world wide. The financial toll is too large to quantify yet because the meter is still running. Back in March, we literally stopped the world from doing anything that involves crowds for months. Yet somehow companies like MGM Resorts (NYSE:MGM), who depend on crowds moving about, are still alive and kicking.
This is not to say that there wasn’t pain, MGM stock fell 82% from January and quickly.
Luckily for investors, it has since recovered most of it. The better news is that unlike indices like the NASDAQ, MGM stock took its time recovering. This is important because it means that there aren’t that many weak hands in the stock right now. The investors who did not panic out of it in March were correct to have faith. Now they are down only by a little bit even if they entered early in 2020.
MGM stock has a good outlook ahead. They just reported earnings and Wall Street liked what they saw. It rallied 35% since then, twice. They did that once and gave back half, so MGM still sits 35% higher than it did at the end of October.
This much good news is too much too fast considering the Covid-19 situation. The virus is back on the rise and going into the flu season to boot. Regardless, I am confident that the support on the chart will hold.
I wrote about the upside potential in August while it was stuck in muck. That worked well then, and the breakout line from that trade is now the support going forward. Prior resistance becomes forward support.
Trade MGM Stock from the Long and Short Term Perspectives
For new positions I would suggest buying it on a pullback closer to $24 per share. This may not happen soon enough, so the alternative would be to buy it above its recent fail at $27.30.
The two strategies are viable for different reasons. Buying the dip makes sense because the bulls are clearly in charge. That’s how MGM stock has been setting higher-lows. Having the baseline at $24 per share is key. The other strategy is a momentum trade which is to buy high and sell higher.
Above $27.30, MGM has open air to completely recover the accident scene from February. There will be lines of resistance but they happened long enough ago that they won’t ruin the rally.
The options markets offer a twist on both of these strategies. We established the fact that there is a solid base at $24, so why not put that thesis to work? Investors can sell the January $24 put and collect $1.40 for it. This trade would profit without needing a rally. The break even for it is $22.60.
The investors would only need time to pass without a correction to realize maximum gains. They can also pair that with buying the upside potential either in stock or in calls. Doing so would make them really long MGM stock but with very little out of pocket expense. Compare that to buying the shares outright and leaving no room for error.
Either way there is support below and opportunity above. It makes no sense to sell the stock . The upside potential is likely easier than the downside risk. This is especially true after the vaccine news Pfizer (NYSE:PFE) and Moderna (NASDAQ:MRNA) recently delivered. The vaccines are going to be much better than the forecasts. It’s only a matter of time before they start fighting the outbreak.
Things Are Getting Markedly Better
I am not one to chase headlines or runaway stocks. Ideally I prefer to buy stocks on dips but doing so for the long term is okay. The action in Boeing (NYSE:BA) stock supports the notion of normalcy returning. Just last night we learned that the 737 Max model will fly again soon. I know this sounds a bit optimistic, but the medical community is looking like they will bail us out.
On the other hand, stocks in general pose a threat because they are as high as ever in a bad environment. Any hiccup in the macroeconomic conditions or the political setup could send us into a quick correction. I doubt that we will have a complete crash like some naysayers are squawking about. That scenario is far off the table and would need a new Black swan.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.