With 4Q earnings season winding down, we mentioned the number of possible option trades would be dwindling as Wall Street prepares for a new season and 1Q earnings in April.
There were, however, a number of put and call option trades we have targeted but not all of them meet our criteria to make the risk worth the reward.
One trade we are eager to see play out is a possible long, short, or strangle option trade on Caesars Entertainment (CZR, $25.85, up $0.31).
The company will confess to their numbers after today’s close and we are expecting at least a 10% move, possibly 15%-20%. This means there could be an option trade that benefits us no matter which way shares move.
The suit-and-ties are expecting a loss of $1.17-$1.73 a share. This is a very wide range and will factor in the move as a number better than a loss of $1.17 might be bullish, providing revenues come in better-than-expected.
Analysts seem to agree the company will report revenues north of $2 billion so anything below this would be bearish.
Caesars’ has a great brand name but the knuckleheads running the company have been running in the red for the past 4 quarters with heavy losses. They losses have been way GREATER than analysts expectations and is apparent of a company with a heavy debt load.
This could be the quarter the company throws in the kitchen sink and we are not sure how shares will react. If Caesars’ starts to shed assets to pay down debt then maybe a turnaround is in play but this takes several quarters if not years to do and we doubt current management can get the job done.
The company become public just 2 years ago and traded in a range of $9 to nearly $18 on its first day of trading before closing at $15. The IPO was overpriced then and we believe shares are over-priced now.
As a pure play on a test to $23-$22.50, we could use the March 22.50 puts (CZR140322P00022500, $0.30, down $0.05) to play a 10% pullback. Of course, with the options expiring next week, we would consider it a lottery trade as shares would need to trade down to $22.20, technically, for us to break even. With some premium built-in these options will double on a drop below $22.
The flip side of the trade, if we were bullish, would have us looking at the March 30 calls (CZR140322C00030000, $0.10, up $0.05) but shares would need to move 16% and kiss $30.10 for the trade to break even.
The aforementioned call and put options could also be used as a strangle option trade and the premiums together would be 40 cents, or $40 to buy both contracts. Ten contracts of each would cost $400 and shares would need to trade under $22 or above $30.40 to start making profits.
We like the odds of a downside play more than the other two trades but we will likely sit on the sidelines either way. The casino stocks have been hot this year so there is a chance for upside risk despite what kind of numbers or outlook Caesars Entertainment gives.
We have said we will be in perfect shape to play the market’s next major move or trend so we don’t have to trade just to trade. We are having a tremendous first quarter with our option trading as we have been pinpoint accurate in calling the market’s run to new all-time highs.
There is still room for 1%-2% more fluff to the upside but our chart work showed all of the indexes at or near their upper price channels. A possible breakout could occur and we have listed upside targets to watch to confirm the rally. Until then, we have mentioned the action could get choppy and sloppy with risk to the downside so continue to be patient.
As we head into the second half of trading, the Dow is down 49 points to 16,369 while the S&P 500 is declining a 6-pack to 1,871. The Nasdaq is lower by 10 points to 4,324 and the Russell 2000 is slipping a 6-pack as well and was last seen at 1,194. A close below 1,200 would suggest further weakness ahead.
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