Gambling Could Be the Next Big Thing
Many investors have watched marijuana stocks soar. Many were reluctant to plunge into the sector because of legal concerns. While marijuana is legal in some states it remains illegal under federal law and that does create some questions for investors.
But, the gains in the stocks did demonstrate that new markets could be lucrative for investors. In particular, markets that were once off limits to investors can become hot when regulators and lawmakers act to reduce restrictions.
That makes sports betting an area that investors should pay attention to after the Supreme Court struck down a 1992 federal law banning commercial sports betting in most states, opening the door to legalizing the estimated $150 billion in illegal wagers on professional and amateur sports.
The decision seems certain to result in profound changes to the nation’s relationship with sports wagering. Bettors will no longer be forced into the black market to use offshore wagering operations or illicit bookies.
Placing bets will be done on mobile devices, fueled and endorsed by the lawmakers and sports officials who opposed it for so long. A trip to Las Vegas to wager on March Madness or the Super Bowl could soon seem quaint.
The law the decision overturned, the Professional and Amateur Sports Protection Act, prohibited states from authorizing sports gambling. Congress said the law was needed to safeguard the integrity of sports.
But the court said the law was unconstitutional. “It is as if federal officers were installed in state legislative chambers and were armed with the authority to stop legislators from voting on any offending proposals,” Justice Samuel A. Alito Jr. said, writing for the majority. “A more direct affront to state sovereignty is not easy to imagine.”
And, some states pledged to move quickly. Among them was New Jersey, which The New York Times noted, “anticipated the decision and had been prepared to quickly take advantage of it.
In 2011, the state’s voters passed a constitutional amendment in favor of legalizing sports betting, and three years later, the Legislature repealed its law against sports betting. Both were challenged in court.
But now the Legislature only has to pass a law establishing the rules and regulations for sanctioned sports betting to begin at casinos and racetracks in the state.”
A Trade on New Jersey’s Moves
That makes the recent price action in The Stars Group (Nasdaq: TSG) interesting to traders.
News from the company triggered the up tick. PR Newswire reported,
“The Stars Group announced today that it launched its BetStars online sports betting brand in the regulated New Jersey online gaming market through its partnership with Resorts Casino Hotel.”
BetStars.com, which is initially available through a mobile app, provides New Jersey customers with an innovative and robust mobile-led sportsbook alongside The Stars Group’s existing online poker and casino offerings available through PokerStarsNJ and PokerStarsCasinoNJ.
“We are excited to introduce BetStars to New Jersey sports fans,” said Matt Primeaux, SVP Strategy & Operations, USA at The Stars Group.
“As one of the largest online gaming companies in the world with millions of customers worldwide, we have successfully launched BetStars in regulated markets across Europe and look forward to expanding and enhancing our New Jersey BetStars offering, including through leveraging the Sky Betting & Gaming acquisition following approval from the UK Competition and Markets Authority, to provide a premier product and experience to our customers in this new and developing market.”
BetStars operates on The Stars Group’s proprietary technology and player account management platform, providing customers in New Jersey with a single account, common wallet, various online and mobile depositing and withdrawal options, and a seamless online betting experience along with The Stars Group’s popular online poker and casino products.
BetStars also provides in-game betting, early cash out options and enhanced bonuses and products. These betting opportunities will initially include numerous sports, including professional and collegiate football, basketball, baseball, golf, hockey, soccer, tennis, and others.
As part of its launch BetStars will offer a series of unique player focused promotions aimed at introducing new customers to BetStars, including a sign-up bonus and “odds boosts”, which multiply the odds and the potential payout to customers.”
After the Supreme Court ruling, the stock may have gotten ahead of itself, but the news shows support could launch a new uptrend in the stock.
Trading the Trend
When a stock is expected to move higher, traders could consider obtaining long exposure to the stock to profit. A number of options strategies could be used to meet this objective.
Among those strategies is a bull put spread that could be used. The risk and reward diagram is shown below and it offers limited risk with limited potential gains. However, it is well suited for a stock which is in an up trend.
Source: The Options Industry Council
This strategy involves two put options. One put option is bought and a second put option with the same expiration date but with a lower exercise price is sold. Selling the put option will generate immediate income, just like the more familiar covered call strategy would. But, unlike a covered call, risk is limited.
Many traders will be familiar with the idea of a covered call. This is a conservative strategy many long term investors use to generate income in stocks they own that are unlikely to make large moves.
Although the bull put spread is different than a covered call, the bull put spread strategy meets the same objective as the covered call which is to generate some income. This trade generates immediate income and carries limited risk.
A Specific Trade for TSG
For TSG, a bull put spread could be opened with the October 19 put options. This trade can be opened by selling the October 19 $22.50 put option for about $0.45 and buying the October 19 $30 put for about $5.25.
This trade would result in a credit of $4.80, or $480 per contract since each contract covers 100 shares. That amount is also the maximum potential gain of the trade.
The maximum possible risk is the difference between the exercise prices of the two options less the premium received. For this trade, the difference between exercise prices is $750 ($30 – $22.50). This is multiplied by 100 since each contract covers 100 shares.
Subtracting the premium from that difference means, in dollar terms, the total risk on the trade is then $270 ($750 – $480).
The potential gain is about 177% of the amount of capital risked. This trade will be for about one week and the annualized rate of return provides a significant gain.
The bull put spread is an example of how options are a versatile tool and could meet many of your trading objectives. In this trade, options provide income and defined risk that could be lower than owning the stock. This strategy also has a high probability of success.
These are the type of strategies that are explained and used in TradingTips.com’s Options Insider service. To learn more about how options can be used to meet your goals, click here for details on Options Insider.