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.
About the Author (Author Profile)
Frederic Ruffy is a well-known trader, writer, and strategist who has spent years educating investors and creating intelligent, insightful, unbiased market observations that are frequently cited by the Wall Street Journal and other financial publications. As senior analyst, Fred provides frequent and regular notes and daily updates for activity of interest.