MGM Mirage (NYSE: MGM) will release its first-quarter earnings ahead of the market open Thursday. Analysts are expecting the casino operator to post a loss of 27 cents per share, compared with a year-ago loss of six cents. Analysts are mixed heading into this report, with five “strong buy” ratings, nine “holds,” two “sells,” and one “strong sell,” according to the OptionsHouse Research tab. Technically speaking, MGM has rocketed 55% higher over the last two months or so but remains well below long-term moving averages, not to mention its October 2007 peak of $100.50. At the time of this report, MGM was trading for $16.41.
There are ways to play MGM in advance of earnings that don’t involve buying (or shorting) the stock. There are dozens of options strategies traders can use whether they are bullish, bearish, or neutral, or if they want to trade based on anticipated volatility (or lack thereof). Below are two hypothetical options trades for MGM ahead of earnings. Remember, these are merely examples, not buy-sell-hold recommendations, and be cognizant of your personal risk/reward parameters before executing any new trades.
*Prices given as of Monday’s close
Bullish Option Strategy: Bull Put Spread
MGM bulls who see additional room for upside (or at least expect limited downside) could consider selling longer-term bull put spreads. The September 15/10 spread can be sold for a net credit of $1.40 by selling the 15 put and buying the 10 put. As long as MGM stays above 15 through September expiration, traders can keep the entire credit collected as profit. The maximum loss, meanwhile, is capped at $3.60 and occurs only if MGM is trading at $10 or below when the options expire. Breakeven for this spread is $13.60; north of this level, the spread will be profitable at expiration.
Volatile Option Strategy: Long Straddle
Relatively aggressive investors sometimes consider long straddles ahead of earnings, as these strategies typically benefit if the underlying stock moves sharply – in either direction. The June 16 straddle (long the June 16 call and put) can currently be purchased for a net premium of $3.00. If MGM rallies 16% to $19 or above or drops 20% to $13 or below, the straddle will be profitable at expiration in seven weeks.
Long-straddle gains are unlimited to the upside if the shares rally and limited only by zero to the downside if the shares drop. A long straddle’s maximum loss is limited, however, to the debit paid. With this and all other American-style options strategies, the trader has the option of closing the trade (by selling the straddle to close) at any point through expiration.
How Will MGM Fare?
Do you think MGM is due for a positive earnings surprise or does it have rocky times ahead? Do you prefer event-based trading or waiting on the sidelines until potential volatility is out of the way? Let us know your thoughts with a comment below.
Compare OptionsHouse rates for stock options with other brokers. For investors who are new to options and want to try out their trades without committing real money, practice using a free virtual trading account.
Photo Credit: smneale
No related posts.
Tags: Bull Put Spread, Long Straddle, MGM, MGM Mirage, Options Strategies, options trading
