One stock that is in an upward bullish channel and that is up over a whopping 27% in the last sixty days is MGM Resorts (NYSE:MGM). MGM Resorts is based in Las Vegas, Nevada and owns and operates casinos in the United States. When looking at a one year chart of MGM Resorts investors will notice that the $12.50 level serves as an inflection point or what I would describe as indifference.
From MGM Resorts' high of around $12.00 in November 2011 the stock dropped twice to around the $9 level. Ever since mid-December the stock has bounced off the $9.00 level and has gained 9.2% over the last five days, rallied 39% over the last thirty days and rallied 27% over the last sixty days. This is not a bad gain if investors bought shares or used options when MGM was below $10. When viewing the chart above, investors will notice the last time MGM Resorts was in the mid 12 range was on October 28th when MGM Resorts had a high of $12.41 and closed at $12.02
When looking at the chart above, if you trace a line from where MGM Resorts closed in late October to where the stock closes today, investors will notice this forms a U shape with $9.50 showing support. Newer investors wanting to make an investment in MGM Resorts will have to ponder if MGM Resorts can continue the bullish move upward or wait for a pullback. I believe the levels that MGM Resorts is currently at can be seen as an inflection point or indifference. I label this as indifference because sometimes while investing, stocks can get to these points where the bullish run can continue or maybe a small pullback is needed. Better to buy low and sell high rather than buy high and try to sell higher.
If you are a newer investor wanting to invest in MGM Resorts here are two option directional strategies to consider on MGM Resorts earnings coming on February 16, 2012 if you are bullish or bearish.
Bullish Option Strategy 1: Covered Call
The covered call is a strategy that for every 100 shares investors buy they can sell upside calls for protection and to reduce the price for the overall investment. If investors were to buy 100 shares of MGM Resorts and selling the February 13 call this will cost $1213
100 times 12.73= 1,273
February 13 call=.60
1,273 (-) 60= $1,213
Investors will have protection if the stock slides to 12.13 or a little over 4% Over MGM Resorts last two earning reports the stock has moved downward and using a covered call strategy would have been profitable. On August 8, 2011 MGM Resorts reported earnings. MGM Resorts stock closed on August 5th at $12.66 and went downward to $11.53 on August 12th. On MGM Resorts last earnings on November 3, 2011 the stock closed at $11.17 on November 1st and went downward to $11.01 on November 7, 2011. MGM Resorts is expected to report a loss, but that loss is less than what MGM Resorts reported annually for FY 2010 (-1.07) and FY 2011 (-.53). Currently, MGM is looking at a (-.39) for annual FY 2012.
Bearish Option Strategy 2: Vertical Put Spread
If investors believe that MGM may not have good earnings or is due for a pullback due to MGM Resorts being up over 39% the last thirty days then a vertical put spread may be a strategy worth looking at.
Buy one February 12 put for .44 and sell one February 10 put for .10
Capital required= $34 per spread
Max Profit= $166
Investors breakeven price=11.40
I like this trade since you're risking $34 to make a max profit of $166, which equals a potential 1:4 payout. There are many reasons to consider being bullish on MGM Resorts, but there are equal reasons to be bearish. In the long term if MGM Resorts delivers a good earnings report or an earnings surprise the bullish ride could continue to the upside. In the short term if I'm going to be bullish on MGM Resorts' 27% gain over the last sixty days, I want to have protection, and that protection comes in the form of a covered call. On the flip side if investors want to risk less to make more, a vertical put strategy could be a nice strategy to profit from. Even if the stock doesn't drop down to the breakeven price, investors can still profit if the stock declines.
I am considering using one of these strategies above, but will wait to employ until earnings is closer. Thank you for reading and good luck.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MGM over the next 72 hours.