Traders playing with house money in gambling high-flier

It can be nice to play with house money.

Just take Scientific Games (NASDAQ: SGMS), a provider of slot machines, state lotteries, and video roulette. It exploded to its highest level in over nine years yesterday on the heels of strong quarterly results. Options activity spiked along with the shares as traders apparently cashed in winnings and kept some chips on the table.

Overall volume was more than 13 times the past month’s average, with a single transaction accounting for about one-third of the total:

  • Less than an hour into the session, a block of 6,000 January 22 calls was sold for $11.25.
  • In the same second, 11,500 January 35 calls were bought for $3.40.
  • Owning calls fixes the price where a security can be purchased, so they can ratchet up in value when a stock rallies or expire worthless if no move occurs. That seems to be what happened in the January 22s. Selling then brought in $6.75 million. (Each contract controls 100 shares, so that’s 100 X 6,000 X $11.25.) Calls expire worthless in the absence of a big enough move.
  • They then used some of that money to buy almost twice as many of the 35 calls. This time they paid $3.91 million. (That’s 100 X 11,500 X $3.40).
  • Rolling from one contract to the other let the investor recover $2.84 million. Who knows, maybe that was their initial investment and they only want to risk “house money” in hope of more upside. Don’t forget their account now contains almost twice as many contracts at half the cost, which creates the potential for even more gains if the stock keeps running into early next year.
Scientific Games (SGMS), 12-year chart

Source: OptionsHouse by E*TRADE.

SGMS stock shot up 27 percent to $34.15, making it the biggest gainer across the entire market in Monday’s session. How to explain that kind of surge? Traders pointed to a narrower-than-expected quarterly loss, plus revenue that blew past the Street’s consensus guestimate. Management touted double-digit growth in its interactive, social-based products, steady gains in traditional casino games, and improved margins.1

It also looks like some folks were betting against the company, because short interest accounted for a lofty 18 percent of the float.2 After all, the company has a big debt load from consolidating with rivals a few years ago. And, now on top of those strong results, they’re looking to refinance some of those liabilities. Bears just can’t catch a break in this market.

And if you like SGMS, there are plenty more gaming-sector catalysts in the near term. Wynn Resorts (NASDAQ: WYNN) announces quarterly results tonight, followed on Wednesday afternoon by Las Vegas Sands (NYSE: LVS). MGM Resorts (NYSE: MGM) and Melco Resorts (NASDAQ: MLCO) are due the next morning. And then early next week investors will be looking for monthly gaming numbers from Macau, the world’s top gambling hub.

Bottom line: One big trader is sticking with SGMS after the stock exploded higher, and more news is coming in the space.


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1. PRNewswire: Scientific Games Reports Second Quarter 2017 Results and Announces Intent to Refinance a Portion of its Debt. 7/24/17. Yahoo Finance: Analyst opinion page for Scientific Games Corporation. 7/24/17.

2. Yahoo Finance: Key statistics page for Scientific Games Corporation. 7/24/17.