Games markets play

01/24/20
  • SGMS pulled back to a potential support level
  • Heavy options volume appeared to send mixed signals
  • High open interest in March $30 calls

Options action in gaming technology stock Scientific Games (SGMS) likely grabbed a few trader eyeballs Thursday morning, but some of them may have been surprised by the path the numbers eventually took them down. Around 12:30 p.m. ET yesterday:

Call options volume was nearly 62 times put volume.

2,300 February $24 calls had traded.

At first glance, that looks pretty bullish—calls were outpacing puts by a wide margin, and there was huge trading in calls with a strike price roughly $2.30 below the current stock price, which was up nearly 1% on a day the S&P 500 (SPX) was in the red.

First appearances can be deceiving, though, especially in options. Turns out the open interest (the number of unclosed options trades) in the February $24 calls was only 34 contracts, which means almost all that volume was a trader (or traders) getting out of their positions.

But that wasn’t the end of the options story. A little more digging showed the biggest position—by far—in any single option was 4,300 contracts (representing 430,000 shares of stock) in the March $30 calls, which suggests at least some traders could be looking for the stock to rally 14% or more before the options expire on March 20.

Now take a look a the SGMS price chart:

Chart 1: Scientific Games (SGMS), 7/25/19–1/23/20. Scientific Games (SGMS) price chart. Near support level.

Source: Power E*TRADE


The stock bounced the past couple of days after pulling back close to its January 6 swing low, which is in the vicinity of an early November breakout that was followed by a six-day, 32% surge to $31.63 (the stock’s highest level in 16 months).  Many traders look for price to test breakouts after a high-momentum move: The approximate breakout level is supposed to act as a support level, and if it doesn’t, it casts doubt on further bullish momentum.

SGMS cranked out a 50% return last year (after being up as much 77% on November 8, right after it released earnings), but as the price chart suggests, the stock can sometimes be a volatile ride—which, for committed bulls who expected support to hold, wouldn’t necessarily be a bad thing.

Options traders looking for a limited-risk, limited-reward way to play a possible SGMS upswing may be considering a bull call spread—long one call option and short a higher-strike call with the same expiration, such as the March $26–$30 spread shown here:

Chart 2: Scientific Games (SGMS) March $26-$30 bull call spread, 1/23/20. Options spread risk-reward.

Source: Power E*TRADE


The position’s risk is limited to the cost of the spread (1.6, or $160 in this case), but the profit is also capped on any move above the upper strike price ($30). If the stock is anywhere between the two strikes at expiration, though, the position should profit.

Options activity can sometimes offer key insights into market dynamics, but like most aspects of trading, there are plenty of ways it can fool you if you’re not paying close attention. Make sure you dig far enough to understand what’s really going on below the surface.

Market Mover Update: A couple of weeks after forming a spike high on January 7, Commercial Metals (CMC) is trading nearly 5% lower, and the February $22 call options have lost more than half their value (see “Metal spike”).

Today’s numbers (all times ET): PMI Composite flash (9:45 a.m.), Baker-Hughes oil rig count (1 p.m.).

Today’s earnings include: American Express (AXP), Air Products and Chemicals (APD), Synchrony Financial (SYF).

 

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