Trader bets on big move in casino owner
10/20/17

Vega, baby.

No we’re not missing an “S”—vega measures an option’s sensitivity to an underlying stock’s volatility.  Here’s what the OptionsHouse by E*TRADE unusual options activity scanner spotted yesterday:

Casino owner Boyd Gaming (NASDAQ: BYD) had over 10,000 options contracts change hands, which was 10 times the average option volume that Boyd usually sees in a given day. The data suggest a trader is taking a shot that either BYD moves up or down by December expiration, or they’re simply hoping for a pop in BYD volatility. Here’s what went down:

  • A trader bought 5,000 BYD December 24 puts for $0.15.
  • And concurrently bought 5,000 BYD December 30 calls for $0.60.
  • Taken together, the net position is long the Dec 24-30 strangle for $0.75 ($0.15 + $0.60).

By owning a strangle, they profit if BYD stock rises or falls before the December expiration. The risk/reward options graph for this position looks like this:

Boyd Gaming (BYD) strangle risk/reward

Source: OptionsHouse by E*TRADE

The trader who bought this strangle has defined risk, meaning they can only lose the $0.75 that they paid for the spread. If BYD were to continue to remain between $24 and $30 per share, their losses are limited. In order to profit from this position, BYD stock would have to fall below $23.25 or rise above $30.75 by December expiration.

However, there is another way the trader could profit from this position; namely, if the volatility in BYD stock were to jump. By owning the options, the trader could be in essence buying in the hopes of volatility. The vega on this position is $0.06. This means that for every one percent increase in the implied volatility of the options, the trader should correspondingly see the price of the strangle increase by $0.06.

Boyd Gaming (BYD) 5/17–10/17

Source: OptionsHouse by E*TRADE

The stock traded in roughly a $3 range from May through October, but recently shot way past its 50-day moving average amid revised analyst estimates1 and has now been hovering around a 10-year high. 

BYD reports earnings on October 26, before expiration. This adds an additional dimension to this position. Perhaps the trader is expecting more options buyers to come into BYD before earnings. That would potentially give them the opportunity to sell the options back at a higher price due to increased demand driving up implied volatility and therefore the prices of the options. Or, perhaps they are expecting a surprise in the earnings report, which could potentially push BYD to gap in one direction or the other.

Either way, this trader is spreading their chips across the table, placing bets on the stock moving in any direction.

 

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1. Yahoo: Boyd Gaming (BYD) in Focus: Stock Moves 6.3% Higher. 10/6/17.