Market Insights

An options trader seems to be on a roll as a casino stock pushes higher.

MGM Resorts (MGM) has bounced more than 15 percent from its low at the start of last week. Today it looks like an investor rolled a covered-call position as he or she looks to squeeze income from its current range:

• A block of 5,000 July 27 calls was bought for $1.69. Volume was below open interest, which indicates an existing position was closed.
• A matching number of August 29 calls was sold at the same moment for $1.14 in a new opening transaction.

Calls fix the price where investors can buy a stock. Selling them generates income here and now, while creating an obligation to deliver shares in the future. If done naked, the strategy can be extremely risky. (See our Knowledge Center.)

However today’s trade was likely part of a “covered call,” married up to at least 500,000 MGM shares. (Each contract controls 100 shares.) In that case, the investor simply generates income from their underlying stock.

So why did they roll the position? There are at least two reasons:

1. They raised their exit price by $2, from $27 to $29. It cost them a net $0.55 to make the adjustment. (That’s the $1.69 paid minus the $1.14 collected.)
2. They’re collecting more time premium. The 27s they bought back had about $0.90 of extrinsic value, while the 29s were entirely extrinsic value.

MGM rose 1.8 percent to $28.90 in late morning trading. It’s still below its highs from late April and early February following a big drop last year. That could make chart watchers expect a neutral move for the time being, which can be suited to income trades like covered calls.

In conclusion: MGM is moving sideways, and options traders are using a time-decay strategy to profit from the pattern.