Las Vegas Sands Corp. ( LVS ) has seen a flood of call volume from the options crowd lately, but most speculative investors have turned their attention toward puts in today's trading. Overall, LVS has seen put volume swell to more than double the stock's daily average, as roughly 13,000 contracts have changed hands so far today. The most popular strike has been the September 29 put, where some 5,600 contracts have crossed the tape.
But while puts are gaining favor in today's trading, call activity continues to be much more interesting. While digging through LVS' option volume, I ran across a block of 1,000 September 30 calls, which traded on the New York Stock Exchange (NYSE) for the ask price of $1.64, or $164 per contract. This block was marked "spread." After a bit of digging, I found the other leg of this spread trade on the September 32 call, where 2,000 contracts traded for the bid price of $0.84. Given this data, we could be looking at the initiation of a vertical ratio call spread, or a credit spread , on Las Vegas Sands Corp.
The Anatomy of a Las Vegas Sands Corp. Vertical Ratio Call Spread
Breaking down this vertical ratio spread position, the trader would have purchased 1,000 September 30 calls for a total outlay of $164,000 -- (1.64 * 100) * 1,000 = $164,000. Entering this leg alone, the trader would need LVS to rally about 9.5% from yesterday's close at $28.89 per share, in order for the position to reach breakeven at expiration. As always, the maximum loss on a purchased call is limited to the initial investment, which is $164,000 in this case.
However, the trader has chosen to offset the cost of buying the September 30 call by entering the second leg of this spread. Specifically, the trader sold 2,000 September 32 calls for a total credit of $168,000 -- (0.84 * 100) * 2,000 = $168,000. Combining this leg of the trade with the purchased September 30 call results in a net credit on the entire position, with the trader pocketing a premium of $4,000 -- $168,000 - $164,000 = $4,000. Furthermore, instead of needing LVS to rally 9.5% in order to reach breakeven, the trader has created a situation where he banks a profit as long as the shares do not rally above $32 per share by expiration.
The maximum profit on this vertical ratio call spread is achieved when the underlying stock rallies to the sold strike, which would be the 32 level in this case. However, since twice as many September 32 calls were sold, this spread position will begin to lose money after LVS moves above $32 per share. Once LVS breaches this region, only half of the 2,000 sold September 32 calls are hedged by the 1,000 purchased September 30 calls. As such, the trader will begin to lose money on the unhedged portion of those sold September 32 calls as LVS moves higher. Below is a chart for a rough visual representation of the trade's profit/loss scenario:
While ordinary vertical call spreads are not greatly impacted by rising implied volatility, a spike in implieds could be detrimental to a ratio spread. Since the trader has sold more contracts than he has purchased, rising implied volatility on these options would negatively impact the position, as it would make it more costly to repurchase these contracts should the trader need to do so. At the time of the trade, implieds for the September 32 calls arrived at 44.09%, while the implied volatility for the September 30 call rested at 47.31%. LVS' two-month historical volatility arrived at 52.53% as of the close of trading on Wednesday, meaning the aforementioned options are considerably inexpensive at the moment.
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