Bulls lay chips down on Macau casino stock
05/17/17

For the third time in a month, traders seem to be placing bets on Macau. 

The city became a casino boomtown last decade as China climbed the rankings of the world’s top economies. Developers went all in, spending billions on resorts, and by 2006 the former Portuguese colony was the planet’s top gambling center.

Most of the big players were dragged lower in 2014 as business retrenched, but this year options traders appear to be putting their chips back on the table. They rolled the dice last month on Las Vegas Sands (NYSE: LVS) and Wynn Resorts (NASDAQ: WYNN) – two U.S. players heavily focused on Macau. Yesterday, activity heated up in Hong Kong-based pure-play Melco Resorts (NASDAQ: MLCO).

Barely an hour into the session, they snapped up 15,000 June 24 calls in a single block for $0.40. At the same moment, they sold a matching amount of the May 22 calls for $0.77. Here’s what it means:

  • Owning calls fixes the price where investors can buy a security, so they can appreciate when a stock moves higher.
  • It looks like they previously owned the May 22s, which means they hit a jackpot when MLCO leapt through $22. They cashed in that winner and rolled about half the money into the June 24s, letting them play further upside with house money.
  • That raised their breakeven by $2, but also gave them an additional month for the shares to run.

Macau’s been on the mend since last summer, when government tax receipts started turning positive for the first time in over two years. These numbers really started ramping last February and have been growing in the double-digits since.1 The next report is due in early June.

Melco Resorts (MLCO) 3-month chart

Source: OptionsHouse by E*TRADE

MLCO’s been on a winning streak as it rides the wave. The shares are up 43 percent so far in 2017, and recently shot to its highest level in almost two years after quarterly earnings beat estimates. Yesterday the stock closed up 2.39 percent to $22.68.

There’s also increasingly bullish sentiment towards international stocks as investors regain confidence in the global economy. Hong Kong’s Hang Seng Index, after all, lagged the U.S.-focused S&P 500 by a wide margin for most of the decade. But this year it’s up twice as much. Europe and Latin America have traded similarly…

Bottom line: Some traders think MLCO is back on a winning streak, born from international enthusiasm after a long dry spell.

 

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1. Gaming Inspection and Coordination Bureau: Monthly Gross Revenue from Games of Fortune.