Continued Consolidation on Las Vegas Sands

Shares of Las Vegas Sands [LVS:NYSE] have made option writers, like me, wealthier over the last three weeks. Having recognized the early signs of a consolidation pattern in the making, short combination trades have proven profitable. A short combination is a spread trade where the trader writes two naked/uncovered options: A put at a lower strike and a call at a higher strike. This is a neutral strategy with the hope the stock's value remains between these two values by the expiration of the options, allowing the trader to earn money.

The stock's value took a turn for the worst in March when rumours about legal issues arose. Early reaction was negative; the stock's value plummeted about 25 per cent in under a month. But as it approached its 200-day moving average, the stock saw some support. It was at this point that more information about the legal suit hit the news and it was apparent that a big disaster was not looming. The stock then gapped up back to the mid-40's.

The stock had some trouble trading above $45 at the end of March and continues to show some resistance in the $45 area, meanwhile, holding above $43. This sideways pattern, often referred to as a trading range or consolidation trade, has held very well for over three weeks now.

Option writers have taken advantage of this range by writing weekly puts at a strike of 43 and weekly calls at a strike of 45. The stock has closed between $43 and $45 on Friday for four consecutive weeks. More importantly, the stock has been volatile enough to allow traders to capture added risk premiums and the ability to wait and write options when the stock falls or rises to $43 and $45 levels.

Often is the case, when implementing a spread strategy, traders will write both legs at the same time. However, because of the volatility, by writing the options on different days or even different times during the day, traders are earning additional premiums. The table below shows the bid value of the options at the high and the low of the day during the stock's high and low.

Time Stock Price Apr 21 45.00 C Apr 21 43.00 P 10:14 AM EST $42.84 $0.14 $0.83 3:55 PM EST $45.86 $1.33 $0.10

As we see, under traditional spread timing methods, if the trader implemented the short combo near the low of the day in the morning, the trader would have earned a net premium of $1.02 (14 cents on call, 88 cents on put). However, seeing that the stock has traded in such a volatile range, a trader could have written the put only, and waited a day or two for the stock to move closer to $45. In this case, the stock did it in three hours. So, instead of earning $1.02, the trader could have earned as much as $2.21 (1.33 cents on call, 88 cents on put). That's roughly 120 per cent more!

However, a trading range is always temporary. It could last only a few weeks, or even a few months. The caveat to a short combo trade is that when a break out up or down occurs, a trader must recognize and close out the in-the-money option before the trade becomes unprofitable. One could consider rolling up the option helping offset losses, if any, while capturing additional time value on a new leg.

Note: I started writing this before the stock made a major move in the final hour of trading today. The material above is for informational purposes only and is not meant to be advice or an opinion that the stock will remain sideways for this week. I have NOT yet opened up a position on LVS this week.

Disclaimer: writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.