WALL STREET JOURNAL
By Chris Dieterich
Kate O’Keeffe contributed to this article
U.S. options traders are more bearish on casino operator MGM Resorts International than at any time over the past two years as the company and its rivals face growth concerns stemming from their key Asia market.
Investors are holding the largest ratio of bearish MGM puts to bullish calls since October 2009. The trend has accelerated over the past six weeks. MGM’s put-call ratio stood at 1.04 after Thursday’s close, up sharply from 0.88 on Aug. 19, according to data from Trade Alert. MGM options traders have held more puts than calls for a month, a period in which its stock fell 17%, more sharply than U.S.-based competitors Las Vegas Sands Corp. and Wynn Resorts Ltd. MGM shares fell 47 cents, or 5%, to close at $9.01 Friday.
Casino operators have been hit by concerns that slowing economic growth in China will hurt Macau, a gaming enclave near Hong Kong. Macau overtook the Las Vegas Strip as the world’s biggest gambling market in 2006, and is poised to rake in more than five times the Strip’s gambling revenue this year.
“These stocks with exposure to China are very volatile. There’s concerns that the economy there is really going to slow up,” said William Lefkowitz, options strategist for vFinance Investments.
U.S.-based casino operators have invested heavily in Macau, which has remained a key source of growth for the companies as the U.S. casino industry slowed in the most recent economic recession. Macau is the only place in China where casino gambling is legal.
The largest open interest in October MGM options are puts that grant the right to sell MGM’s shares for $9 over the next two weeks. U.S. options exchanges began listing weekly expiration options contracts in MGM and Wynn in recent weeks.
MGM’s stock has fallen nearly 40% over the past three months. Las Vegas Sands is down 8.1% over the same period, while Wynn is down 18%.
The strength of China’s economy is uppermost in the minds of equity investors keeping an eye on U.S.-traded stocks with exposure to the world’s second-largest economy.
“If China is headed for a hard landing, there’s going to be less demand from the middle class there,” said John Canally, economic strategist at LPL Financial, referring to the rockier of two economic growth scenarios.
China has been tightening the money supply to combat rising inflation. Some analysts posit that credit-tightening could reduce Macau’s gambling revenue growth.
Data this week showed September gaming revenues in Macau rose 39% from the prior year, a rise that disappointed some analysts. The number was down from record 57% year-over-year growth in August.
“We expect continued pressure on Macau names given mounting concern over a soft landing in China,” said Rachael Rothman, an analyst at Susquehanna Financial Group in a note to clients earlier this week.
Traders held roughly 509,000 MGM put options at Thursday’s close, compared with 489,600 call options. The number of outstanding put options in the market has exceeded the number of call options since Aug. 8.
MGM is last by market share among the six authorized Macau casino operators. Casino tycoon Stanley Ho’s SJM Holdings Ltd. is the leader in Macau by revenue. Shares of MGM China Holdings Ltd. began trading in Hong Kong in June.
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