Las Vegas Sands recently bounced off lows around 43 and is a top analyst pick for 2024. Granted, it's been tracking below its 200-day moving average line for months now, but if you think LVS stock is ready for a rebound this option strategy is a way to play it. Rather than going long the stock, you can use options to participate in the move at a fraction of the cost.
The Poor Man's Covered Call On LVS Stock
The strategy we'll cover today is affectionately known as a poor man's covered call.
To execute a poor man's covered call, a trader buys a long-term, deep in-the-money call and sells a short-term out-of-the-money call.
It's similar to a covered call except the long-term bought call effectively replaces the long stock position for a lot less cost.
To trade a covered call on LVS stock, an investor would need to buy 100 shares of the stock at a total cost of around $4,760.
But you can get your exposure to Las Vegas Sands another way. The Jan. 17, 2025 call on LVS stock with a strike price of 40 is trading around 11.60 per share. The cost is just $1,160 for the 100-share contract, which is much less than it would cost to purchase 100 shares outright.
The trader can hold that call as a bullish trade or sell calls against that position to reduce the cost and generate some income.
For example, selling a March 15 call on LVS stock with a strike price of 52.50 would generate $125 in premium. That helps offset the cost of the initial option purchase but still provides some capital gain potential.
The downside of the trade is that gains and losses will be magnified as you are effectively trading a leveraged position.
Risk Management Is Still Key
In terms of risk management, I would rethink the position if LVS stock drops below 43.77, which is around 8% below the current price.
The delta of the initial position is 47, which means the exposure is equivalent to owning 47 shares of LVS stock, although this will change over time as the stock moves.
If the March 52.50 call expires worthless, traders can continue to sell monthly calls against the long call option to further reduce their cost basis.
This is more of a turnaround play as the ratings currently have a poor showing. According to the IBD Stock Checkup, LVS stock is ranked No. 7 in its industry group and has a Composite Rating of 62, an EPS Rating of 81 and a Relative Strength Rating of 27.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
