Melco Crown Entertainment has been on an explosive run, and one investor is using options to smooth the ride.
Our tracking programs detected the purchase of 12,500 May 24 calls for $0.65 and the sale of an equal number of June 25 calls for $0.85. Volume was below open interest in the May contracts but not the Junes, which suggests that an existing short position was closed and rolled to the higher strike.
The investor probably owns shares and sold the options as part of a covered call strategy. Writing the upside contracts lets him or her collect premium, reducing their downside risk and volatility. It also limits the amount of money they can make in the event of a strong rally. (See our Education section)
Today's transaction resulted in an incremental credit of $0.20. It also raised by $1 the level at which the investor can sell his or her shares, and kept them in the position for an additional month.
MPEL is down 1.17 percent to $24.43. The Chinese casino operator has more than doubled since July, when it bounced off support at its 500-day moving average. Its last earnings report on May 8 was mixed, with profit ahead of forecasts but revenue lagging consensus.
Total option volume is 9 times greater than average so far today. Calls outnumber puts by a bullish 30-to-1 ratio.
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