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Trading the Supreme Court

Trading the Supreme Court

SGMS logo

It is rare that the nation’s highest court provides trading ideas. Many of its decisions are related to arcane areas of patent law or the interpretation of obscure clauses buried in the hundreds of pages of a law. But, a decision issued this week was different.

The U.S. Supreme Court basically allowed states to legalize sports betting in a defeat for the major American sports leagues when the majority sided with New Jersey’s bid to allow gambling. The Court ruled part of a 1992 federal law that prohibited sports betting in most places was incantational.

The court upheld the legality of a 2014 state law permitting sports betting at New Jersey casinos and horse racetracks and voided the federal Professional and Amateur Sports Protection Act (PASPA). Some states see sports betting, like lotteries, as a potentially important source of tax revenue.

The ruling takes the United States a step closer to legal sports betting in numerous states, perhaps nationwide, rather than just in select places such as Nevada, home to the gambling capital Las Vegas. The current illegal sports betting market is worth billions of dollars annually.

“New Jersey has long been the lead advocate in fighting this inherently unequal law, and today’s ruling will finally allow for authorized facilities in New Jersey to take the same bets that are legal in other states in our country,” New Jersey Governor Phil Murphy, a Democrat, said in a statement.

The federal law at issue had effectively prohibited sports gambling in all states except Nevada and, to a limited extent, Delaware, Montana and Oregon.

In addition to New Jersey, five other states – Connecticut, Mississippi, New York, Pennsylvania and West Virginia – already have sports betting laws in place that would allow them to move quickly, according to a Fitch Ratings report.

Finding Winners in the Gambling Industry

This news will provide traders with a number of opportunities in the coming weeks. Among those opportunities is Scientific Games Corporation (Nasdaq: SGMS).

Scientific Games develops technology-based products and services, and related content for the gaming, lottery, and interactive gaming industries worldwide.

The company’s Gaming segment sells new and used gaming machines, electronic table systems, video lottery terminals (VLTs), conversion game kits, and spare parts; slot, casino, and table-management systems; table products, including shufflers; and perpetual licenses to proprietary table games.

The company’s Lottery segment designs, prints, and sells instant lottery games, as well as offers instant game-related services comprising game design, sales and marketing support, and inventory management; and provides lottery systems, including hardware, software, and instant game validation systems.

In addition, this segment provides software, hardware, and related services for lottery operations, including draw systems, instant ticket validation systems, and sports wagering and keno systems; and lottery systems software maintenance and support services.

The company’s Interactive segment operates social casino-style, slot-based, and bingo-based games through Facebook, iOS, Android, and various other desktop and mobile platforms; and provides content through remote game server technology, to licensed online casino operators on desktop and mobile platforms, as well as play-for-fun and play-for-free white-label gaming for land-based casinos.

All of these segments could benefit from an expansion of gaming. Traders immediately jumped on the news.

SGMS daily chart

Now, SGMS is unlikely to give back the gains in the short run because traders will probably wait on additional news. This creates a trading opportunity.

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.

Bull Put Spread

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 SGMS

For SGMS, a bull put spread could be opened with the June 15 put options. This trade can be opened by selling the June 15 $50 put option for about $0.95 and buying the June 15 $49 put for about $0.55.

This trade would result in a credit of $0.40, or $40 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 $1 ($50 – $49). 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 $60 ($100 – $40).

The potential gain is about 66% of the amount of capital risked. This trade will be for about two weeks 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.