When traders play with house money: Options report

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Roll, roll, roll your calls… never a bad idea when you’re riding a monster rally.

Just look at Scientific Games (SGMS). The provider of slot machines and state lotteries has more than quadrupled in the last year as earnings improve and management adds new customers online. Yesterday an options trader appears to have adjusted what looks like a massively profitable position in the name:

  • A block of 10,000 January 30 calls was sold for $21.65. Volume was below open interest, which suggests they unwound an previous holding.
  • It looks like they also bought 10,000 January 60 calls for $6.40 in a new opening transaction.

Remember, calls fix the price where a stock can be purchased. They can generate significant leverage to the upside or expire worthless if no rally occurs. In this case, they made money because SGMS blew well past the $30 strike. See our Knowledge Center for more.

Wednesday’s transaction is known as a “roll,” selling one contract and buying another. It let them potentially recover $15.25 of capital and remain in the name in hope for continued upside. In the parlance of Vegas, they took money off the table, and now they’re playing with house money.

SGMS ended the session up 8.55 percent to $49.50. Overall option volume was more than 5 times the monthly average, with calls outnumbering puts by a bullish 16-to-1 ratio.

This post is for education purposes only and should not be interpreted as a trade recommendation. Options trading may not be suitable for all investors.

Scientific Games (SGMS)
Scientific Games (SGMS)
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David Russell is VP of Market Intelligence at TradeStation Group. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.