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February 24, 2013 / redman59

Trade Idea: LVS for the Upside and Low Risk with Options

While I was absent from the markets on Friday there seemed to be much buzz about LVS in the social media space and across the options market.  Much of the action in LVS options is attracted to the March and May option chains.  A picture of the March chain is below:


This to me looks like a ratio spread to be confirmed by looking at open interest on Monday.  In this spread the trader is buying the March 52.25 calls and selling twice as many March 55 calls for a net debit 0.69c.  Also there was action in the May options chain as well.  There was a big block of 17,397 calls on the ask for a 2.05 debit.  All together the May 52.5 calls saw volume of 27,245 contracts vs open interest of 282.  A picture of the T&S can be seen below:


Now that the options action has set the alert, it is time to look at the chart to see if the technicals align with the action:


In the chart we can that LVS has been in a downtrend (annoted by red bars) with a reversal bar (green bar).  If LVS breaks above the high of the green bar there is a probability for a continued long trade.  If it breaks below the low of the green bar then the downtrend is likely to resume.  Note that this is all short-term price action in timeframe of a swing trade.  On another note for the bullish side LVS saw a nice hammer candle on the 100ema on volume above average that was confirmed by Fridays candle on volume above average.

So what’s the trade?

In this scenario I like to look at the recent option action, especially the ratio spread.  In this trade the trader is looking at the following risk profile with March expiration in mind:

lvs_0222dIn following this trade I would be looking at upside for LVS as this big trader is looking for it to close between 52.43 and 57.57 at March expiration.  The furthest red-dashed line to the left represents current price.  This risk profile combined with the May action as annotated above has me leaning bullish in LVS.

My trade recommendation is an upside March call butterfly spread.  I personally would trade the same ratio spread but for margin purposes I believe the butterfly spread offers much of the same opportunity without the same margin requirements.  I like the March 52.5/55/57.5 call butterfly for a 0.19c debit (max loss $19).  This captures approximately the same range for a reduced cost.  Risk profile can be seen below:


I really like this trade from a risk:reward standpoint and that it actually follows the big trade that was put on in the March ratio spread.  As always this trade is based on my thoughts and the individual trader is responsible for his/her decisions.

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