On the surface, multi-use integrated resorts operator Las Vegas Sands (LVS) might appear a compellingly bullish opportunity. Yesterday, while the rest of the market mostly stumbled, LVS stock enjoyed a sizable lift of more than 2%. What’s more, it represented one of the highlights of Barchart’s unusual stock options volume indicator, suggesting heightened enthusiasm among smart money investors.
Indeed, total volume reached 67,469 contracts versus an open interest reading of 417,192 contracts. Monday’s volume represented a 329.36% bump up from its trailing one-month average metric. Further, call volume clocked in at 53,969 contracts versus put volume of only 13,500. This pairing yielded a put/call volume ratio of 0.25.
On paper, this framework appears bullish. After all, call options give the holder the right (but not the obligation) to buy the underlying security at the listed strike price. Further, LVS stock commands a 72% Strong Buy rating. Technical analysis indicators suggest that the near-term trend of optimism will continue marching forward.
Plus, Wall Street analysts peg LVS stock as a consensus Moderate Buy. Still, the smart money doesn’t seem entirely convinced.
Looking at options flow data — which focuses exclusively on big block transactions likely placed by institutional investors — net trade sentiment sat at $1.39 million below parity, thus favoring the bears. Indeed, transactions with bearish sentiment grossed almost $1.84 billion below parity, while bullish transactions amounted to only $444,800.
Yes, unusual options activity saw a pronounced spike in call transactions. However, this was driven by large investors selling calls. Given that LVS stock already gained over 23% in the past six months, it’s possible that the smart investors want to bag their profits while they still can.
Mathematically, it might not be a bad move.
Looking at the Statistical Reality of LVS Stock
Generally, the broader equities market features an upward bias. However, this framework doesn’t apply to every publicly traded security. Indeed, for Las Vegas Sands, its equity presently suffers from a negative probabilistic bias.
Over the past five years, the probability that a weekly return (defined as the difference between Monday’s open and Friday’s close) will be negative lands at 52.3%. Therefore, if you had to place a directional weekly options wager on LVS stock, it actually would behoove you to be bearish. Over the long run, you’ll stand a better chance of being profitable.
Still, a 2.3% odds above a coin toss — while not nothing — is barely better than mere guessing. Plus, with such a small margin, a streak of bad luck could easily ruin your strategy. Therefore, it wouldn’t make sense to be aggressively bearish on Las Vegas Sands.
However, the beautiful thing about multi-leg options strategies is that the trader can artificially define the parameters of success (within reason). In other words, by having the breakeven price above the current market price, a speculator can calculate contextually realistic probabilities.
Let’s suppose that we’re interested in bear call spreads, essentially mimicking the trades executed by the smart money in the aforementioned unusual options screener. Those that have a Barchart Premier membership can quickly gain access to all the mathematically viable (or sensible) spreads.
Following Monday’s close, the trade that stands out is the 56/58 bear call spread (that is, shorting the $56 strike and going long for protective purposes the $57 strike). Here, LVS stock must not breach the lower strike in order to receive the maximum yield of 23.46%.
On Monday, LVS closed at $55.17. For it to reach $56, the security must rise 1.5%. If we plug this profitability threshold into our probability matrix, we discover that such a weekly return has only occurred 35% of the time. That means there’s about a 65% chance that this trade will yield the maximum reward.
What’s more, the actual breakeven price for this trade stands at $56.38 or 2.19% up. Statistically, the likelihood that LVS stock will rise 2.19% higher is only 30.38%. Interestingly, Barchart calculates the probability of profit of the 56/58 bear call at 67.4%. That seems very reasonable, considering that there’s now even less time for LVS to generate a substantive net weekly return.
A Cautionary Note
Now, before you dive into LVS stock, you should realize that bear call spreads can be inherently risky. A yield of 23.46% isn’t that great because all it takes is one maximum loss to ruin several other positive trades. So, you must have high conviction that LVS stock will go down.
Further, the probabilities that I calculated are based on trailing five-year data. Of course, over the next five years, the nature of the security can change; for example, Las Vegas Sands could quietly transition from a negative bias to a positive one.
Still, I am comforted by the empirical nature of this analysis. Both the hard numbers — the numbers that cannot be denied — and Barchart’s proprietary probability calculations generally tell the same story: the 56/58 call spread (if you’re okay with the limited yield) is worth considering.
Yes, bear call spreads can be risky. However, if you’re going to take the risk, you might as well do it on a security where the odds favor the pessimistic speculator.
