Melco Crown Entertainment Ltd (MPEL) $4.21 -7.06%

A massive spread surfaced in Melco Crown Entertainment (MPEL) an hour before the closing bell Monday when a strategist bought 18.2K Jan-10 calls at the $7.5 strike for 70 cents and sold 18.2K Jan-10 calls at the $12.5 strike for 10 cents on the PHLX. An exchange-floor contact confirms the spread was bought and, judging by the open interest, it appears that both leg are opening. If so, the strategist paid 60 cents and has a $4.40 potential payoff if the stock closes above $12.5 by the January 2010 options expiration. That, might be a difficult feat to accomplish, as shaers of the Hong Kong casino opearator fell 32 cents to $4.21 Monday.

Yet, as far-fetched as it seems, the spread is noteworthy for several reasons. First, it involves a substantial number of contracts and more than $1 million in premium. Obviously, the strategist is not likely to pay more than $1 million unless they expect a move back to the breakeven (7.5 + .6 = $8.10) or more by the expiration. In addition, unsual activity was seen in MPEL on April 2 (check visual flow recap charts).

Finally, the stock has been performing relatively well and recent broke out of a range (chart above). It pulled back towards a support area around $4.10 and the strategist appears to view the weakness as a buying opportunity. Taken together, the activity seems interesting enough to take a closer look–await signs stock is stabilizing, then consider a buy-write or a bull call spread, using a definite break back below $4 as a stop loss.

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