Shares of lottery ticket maker Scientific Games (NASDAQ: SGMS ) definitely haven't been on a lucky streak since reporting earnings on Aug. 1. SGMS stock has fallen over 25% in the past five trading days to close at the lowest levels in nearly a year.
While the earnings report was somewhat disappointing, especially on the revenue side, the subsequent price reaction is definitely getting overdone. Look for SGMS stock to get on a run and head higher over the coming months.
Click to Enlarge Scientific Games is getting extremely oversold from a technical perspective. The 9-day RSI is at by far the lowest levels over the past year, with a reading that actually dipped below 10. Previous instances when SGMS stock even came close to approaching such dramatic levels invariably marked a short-term low in the shares.
SGMS also had a major reversal yesterday, with shares trading all the way down to $31.45 before rallying to close slightly higher on the day at $34.85. This type of price action, especially following such a brutal drop over the prior of four days, is many times an indication that the selling may finally be exhausted.
SGMS also has seen huge repeat call buying over the past few days. On Monday over 7,000 contracts of the Oct $40 calls were bought versus just 216 open interest. Yesterday saw over 10,000 contracts of the Aug $35 calls bought (only 132 open interest) in addition to another 7,652 of the Oct $40 calls.
To put it in perspective, 10,000 call option contracts equates to 1 million shares of stock. This type of huge, repeat call buying is many times the hallmark of big time institutional players who are well informed and looking to lever up. Sometimes not a bad idea to follow along with them.
Implied volatility in SGMS is on the high side at the 72nd percentile, making options comparatively expensive. This favors including some option selling when constructing trades. So to position bullishly alongside those big-time call buyers, a call debit spread makes sense.
SGMS Trade Idea
Buy SGMS Sep $35 calls and sell SGMS Sep $37 calls for a 70-cent net debit.
Maximum risk on the trade is $70 per spread with maximum potential gain of $130 per spread. Ideally, SGMS stock closes above $37 at September expiration for a return on risk of 185%.
Tim may hold some of the aforementioned securities in one or more of his newsletters. Anyone interested in finding out more about Tim and his option-based strategies can go to https://marketfy.com/item/options-and-volatility .
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