Scientific Games Attracts Attention of Bullish Options Traders

Posted on: June 5, 2019, 01:00h. 

Last updated on: June 5, 2019, 11:13h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of Scientific Games Corp. (NASDAQ: SGMS) closed slightly higher Tuesday, extending the stock’s winning streak to five days and its gain over the past week to nearly 12 percent.

Scientific Games stock casino share
Scientific Games is a favored stock among options traders. (Image: Inside Asian Gaming)

The stock’s recent run appears to be luring options traders betting on more upside for the maker of gaming machines, electronic table systems, video lottery terminals, and wagering equipment. On Tuesday, options traders bought 505 of the July 2019 $22 strike calls on Scientific Games, compared to purchases of just 17 puts at the same strike.

Call options are bullish bets, meaning the buyer of those contracts is wagering the underlying stock, in this case Scientific Games, will rise. Put options are bearish. Buyers of those contracts want the stock to decrease in value.

Tuesday’s activity in Scientific Games call options boosted open interest in the July 2019 $22 strike to 6,222 contracts compared to just 589 put contracts at the same strike. Those contracts expire on July 19, which means purchasing the calls need shares of Scientific Games to rise to $22 before expiration date. The stock closed at $20.53 yesterday.

The June 2019 $21 strike calls have open interest of 1,033 contracts, a 2-to-1 advantage over puts at the same price. Those options expire on June 21.

Bears Have a Chance

While options data confirm bullish bets are being made on Scientific Games, the stock’s chart indicates traders betting on declines for shares of the Las Vegas-based company could be vindicated. Currently, the stock resides nearly 10 percent below its 200-day, or 40-week, moving average, an indicator used by many market participants to gauge the strength of a security.

Important technical indicators can act as what are known as support or resistance areas, supporting a stock when it declines to a particular price point or preventing a stock from moving higher when the shares reach a certain price range. In the case of Scientific Games, one of the major processors of online sports wagers, its 200-day moving average could prove to be stiff resistance.

Run-ups to this moving average have been bearish for the stock,” according to Schaeffer’s Investment Research.

“Specifically, there have been four similar signals over the past two years, after which SGMS was lower three weeks later 100% of the time, averaging a loss of nearly 12 percent,” the note concluded.

Another Issue

Along with the potential for Scientific Games to be stymied by technical resistance, there is another factor to consider. Analysts are bullish on this stock, but shares of Scientific Games are lower by 65.58 percent over the past 12 months and the average price target on the company is just over $32.

That means shares of Scientific Games would need to rally almost 60 percent from Tuesday’s close to hit the average price estimate analysts have on the company. With the stock having been punished over the past year, near-term weakness in the shares could spark analyst downgrades or downward revisions to price targets.

Options traders in Scientific Games remain unfazed.

“Traders have bought to open nearly 89 calls for every put on the stock,” according to Schaeffer’s. “This ratio ranks in the 97th percentile of its annual range, pointing to a much healthier-than-usual appetite for bullish bets over bearish of late.”