This City Might Be the Best Gaming Investment in the World
Las Vegas is synonymous with gambling in the United States. It seems as if other cities try to duplicate the success of Las Vegas but are unable to. Gambling hasn’t revived the fortunes of Atlantic City, upstate New York, rural Pennsylvania and a host of other areas that hoped for Vegas style revenues.
It takes a unique combination of factors to create Las Vegas. There is gambling. But, the city is also able to welcome families and conventions. Restaurants and retailers do well in the deserts of Nevada. Las Vegas is also accessible to other tourist destinations.
While Las Vegas is unique in the US, there are other cities around the world that rival its reputation. Monaco, for example, is an independent city-state on the French Riviera known for its upscale casinos, yacht-lined harbor and prestigious Grand Prix motor race which runs through Monaco’s streets.
There is also Macau, an autonomous region on the south coast of China, across the Pearl River Delta from Hong Kong. A Portuguese territory until 1999, it reflects a mix of cultural influences.
Giant casinos and malls on the Cotai Strip, which joins the islands of Taipa and Coloane, have earned Macau the nickname, “Las Vegas of Asia.”
Trading Gambling in Asia
Macau has seen an uptick in business recently. Gross gambling receipts (GGRs) increased 36.4% in January, according to figures released by Macau’s Gaming Inspection and Coordination Bureau. That is the biggest jump since February 2014 and easily beat forecasts of a 27% growth, according to a Bloomberg survey of seven analysts.
This could market a reversal in Macau’s fortunes that began in 2014 when the Chinese government’s sweeping campaign to rein in “profligate and irresponsible spending by officials” led to a steep drop in revenue for Macau’s casinos.
In 2014, a number of affluent VIP gamblers, many of them Chinese government officials, decided to give the gaming hub a miss for fear of being reported for their lavish lifestyle, which included splashing out on gambling activities.
Macau has been slowly recovering since August 2016. The turnaround is being driven by more casual, or “mom and pop,” gamblers visiting Macau, which is the only legal place for gambling in China
Among the trading possibilities for Macau is Melco Resorts & Entertainment (Nasdaq: MLCO). The company develops, owns and operates casino gaming and entertainment casino resort facilities in Asia, principally in Macau and the Philippines.
Its properties include three casino based operations in Macau, namely, City of Dreams, Altira Macau and Studio City, and non-casino based operations in Macau at its Mocha Clubs. It also has a casino based operation in the Philippines, City of Dreams Manila.
It is developing the fifth hotel tower at City of Dreams in Cotai, Macau. Its other operations also include Taipa Square Casino, Macau operating within Hotel Taipa Square.
The stock’s fortunes closely track Macau’s fortunes.
The current up trend in Macau bodes well for MLCO.
A Trade for Short Term Bulls
As with the ownership of any stock, buying MLCO could require a significant amount of capital and exposes the investor to standard risks of owning a stock.
To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.
Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.
To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.
This strategy is designed to profit from a gain in the underlying stock’s price but has the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.
Source: The Options Industry Council
Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.
A Specific Trade for MLCO
For MLCO, the April 20 options allow a trader to gain exposure to the stock.
An April 20 $28 call option can be bought for about $0.80 and the April 20 $30 call could be sold for about $0.30. This trade would cost $0.50 to open, or $50 since each contract covers 100 shares of stock.
The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.
In this trade, the maximum loss would be equal to the amount spent to open the trade, or $50.
The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.
For this trade in MLCO the maximum gain is $1.50 ($30 – $28 = $2.00; $2.00 – $0.50 = $1.50). This represents $150 per contract since each contract covers 100 shares.
Most brokers will require minimum trading capital equal to the risk on the trade, or $50 to open this trade.
That is a potential gain of about 200% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.
In this trade, options provide income and defined risk. These are the type of strategies that are explained and used in TradingTips.com’s Extreme Profits Calendar service. This service uses seasonals as one indicator in its trade selection process. To learn more about how options can be used to meet your goals, click here for details on Extreme Profits Calendar.