MGM Resorts International (MGM) has been very bullish and piques a lot of interest between investors. We are cautious though, and not sure it is a good long-term investment yet. We take a look at this reasoning and then offer an idea as to what strategy to use if you are interested in making money with MGM.
MGM, through its subsidiaries, primarily owns and operates casino resorts in the United States. The company's resorts offer gaming, hotel, dining, entertainment, retail, and other resort amenities. It also owns and operates golf courses and a golf club. As of December 31, 2010, the company owned and operated 15 properties located in Nevada, Mississippi, and Michigan, and has 50% investments in four other casino resorts in Nevada, Illinois, and Macau.
Even though MGM has been on a bullish journey the last 60 days and has grown substantially, we would advise caution upon jumping into the stock too quickly. The reason for this is its long term track record. Since April of 2010 (almost two years now) it has moved within a trade zone between $9 and $16.5. There is nothing special about the move that MGM is on now. It has moved up like this three times before while trading in this zone, only to be thwarted at the $16.5 resistance level. Four times it has pushed against this level and has been beaten back. With this recent rise, we come upon that level of resistance again.
As an investor making a decision whether to put money into MGM long term, the soul searching question is whether it will lose steam to resistance again or not. Will it push through or will it bounce back? This is the agonizing dilemma we face. One point to consider is the recovering economy. Las Vegas was hit like every other industry by the sluggishness we have experienced in the last 3 years. MGM was not immune. If the U.S. economy continues to recover, MGM should also continue to recover and this is something that may push the stock higher. But, since much of MGM's income has come from its Macau business, if it decelerates, so could the value of the stock.
How to Make Money with MGM in 2012
Long-term investing in the stock at this moment is a judgment call as to whether one believes the stock will push through resistance. At this point, we like shorter term option plays that use the movement in the trading zone and limit risk at the same time.
The best type of short term strategy for this would be a Bear Put Spread at this point and on the lower end of the zone, a Bull Call Spread. The Bear Put Spread is a vertical debit spread strategy that utilizes directional movement in the stock but at the same time limits risk. In this strategy we will anticipate MGM's bounce off the resistance area and play the pullback. If it pulled back today, we will make the following play:
Buy a March 2012 '13' put (presently priced at $0.20)
Sell a march 2012 '12'' put (presently priced at $0.08)
Debit to begin the trade: $0.12
Max Profit: (1.00 - .12)= $.88
This is not a bad play with the limited risk involved. Another option would be to buy out farther in the year. This is a good way to make money on MGM and yet limit one's risk early in 2012.