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 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.
Click to Enlarge 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.
