We are making a short term call option move on MGM Mirage (NYSE: MGM). The stock price has been tremendously depressed and, looking at the call option buying action, seems like it is on a bounce back. The fundamentals of this casino company are not great and with a recession behind us the company has suffered. But just as all good things come to an end, all bad things also come to an end. The stock is down from its 52-week high of over $16 to around $9 at the time of this writing. A comparative chart analysis of the last 3 months with the S&P500 is given below.
But the biggest catalyst for our move is the fact that call option volumes went through the roof yesterday. One thing we have learnt from te market is to follow its trend. Do not fight it. For trading and making short term plays, that can be very profitable.
So, we are buying the February 2010 $11 call options at a premium of $55 per contract. Why did we select this call option? It gives us a little extra time for the trade to play out. The open interest on this call option is quite high (around 8,000 contracts) and that means we are assured of some trading in the option. Thirdly, the stock price is hovering around the $9.5 range. Even though, from a percentage perspective, we are expecting a stock price increase of over 10% in around 6 weeks, it seems like a reasonable figure.
Our expectation, as usual, is to generate a gain of 100% on the contract premium.
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