I sold the shares when they were down 12.5% from when I opened the bull position. I structured the position as short vertical option spreads. They closed for a loss on risk of 47.3%.
Update 6/19/2013: As noted in the the "Decision for my account" section at the end, I delayed a trading decision until after the Federal Reserve money policy announcement and Chairman Bernanke's statement. Neither had noticeable impact on MPEL, and I've opened a bull position, structuring it as vertical option spreads sold for credit. The spreads expire in July and are short $25 puts and long $23 puts. The fill was a few cents below what I had hoped. The maximum yield at expiration is 22.5%, and the hedge at expiration is 2.9% below the stock price at entry.
Melco Crown Entertainment Ltd. (MPEL) has broken above its 20-day price channel, continuing a leg up that began in July 2012 from $9.13 and has proceeded without only one interruption for a small, two-week correction.
The bull signal was confirmed today by MPEL trading above the breakout level, $24.97. The stock on Tuesday rose to a new all-time high, $25.20.
If I take the trade, it will be the second time around for me and MPEL. My prior position in the stock, last March, closed for a nice profit on my option spreads. The entry post with details on the results can be read here.
This is MPEL's fifth breakout to the upside in the current leg. Three of the four completed bull signals were profitable, for an average yield of 22.3% and a lifespan of 48 days. The one unsuccessful signal produced a 7.2% loss in 10 days.
A 75% success rate is always impressive, and a 15.1% yield spread between the winners and the loser makes it all the more so.
MPEL has been a consistent winner in upside plays. It has completed a dozen upside breakouts since the long-term uptrend began to pick up speed in 2010 for a 58% success rate and an 8.1% win/lose yield spread.
Altogether 11 symbols survived my initial screening, all having broken out to the upside. See last night's post, "Wednesday's Prospects", for details.
I focused my attention in second-wave screening today solely on the most liquid stocks, those with average volume of a million shares or more per day. There are two other symbols meeting that criteria. ERIC has failed confirmation with 3-1/2 hours to go before the closing bell. LYB was confirmed but has a far weaker yield spread.
The Federal Open Market Committee is wrapping up a two-day meeting amid much speculation about when they're moderate their aggressive easing policy. The FOMC state will be issued at 2 p.m. New York time, and Chairman Bernanke will hold a news conference at 2:30 p.m.
Those events could swing ERIC into confirmation or MPEL into non-confirmation.
Melco Crown is a gaming and resort company headquartered in Hong Kong and with operations centered on nearby Macau, a major gambling and entertainment hub in Asia. Analysts are positive toward MPEL's prospects, giving it a 54% enthusiasm rating.
The company's financials are more of the slow and steady variety, with 12% return on equity. Debt is higher than I like, at 72% of equity.
As I look at three years of history, I see that earnings peaked in the last two quarters of 2011 and the 1st of 2012. Results since have come in below their year-ago counterparts, with the exception of the 2nd quarter, typically the weakest report of the year, which was higher in the 2nd quarter of 2012 than a year previously.
Earnings in the last three quarters of 2010 and the first of 2012 were quite low, and in fact the 2nd quarter of 2010 produced the one loss of the three-year span. In the last two years, when earnings picked up to current levels, MPEL has surprised to the upside five times and to the downside, twice.
Institutions own only 27% of shares and the price has rocketed up to stratospheric heights. It takes $39.90 in shares to control a dollar in sales.
MPEL on average trades 3.6 million shares a day and supports an excellent selection of options strike prices with four-figure open interest. The the bid/ask spread on front-month at-the-money calls is relatively narrow at 5%.
Implied volatility, at 36%, is running well below the six-month range. There was a spike in February that carried volatility up to 80%. Eliminating that still leaves current volatility below the adjusted range. It has been trending gently downward this month.
Options are pricing in confidence that 68.2% of trades will fall between $22.55 and $27.73 over the next month, for a potential gain or loss of 10.3%, and between $23.89 and $26.39 over the next week.
Option trading today is on the slow side, with calls at 20% of average volume for the past five days, and puts at 33% of average.
The fair-price zone on today's 30-minute chart runs from $25.07 to $25.16, encompassing 68.2% of transactions surrounding the most-traded price, $25.09. The price opened below the range and quickly rose to the top, where it remains, with three hours to go before the closing bell.
MPEL next publishes earnings on Aug. 19.
Decision for my account: I'm not making a final decision until after the FOMC announcement at 2 p.m. New York time.
If MPEL's chart remains unchanged, then I shall enter a bull position, structuring it as vertical option spreads sold for credit, short the $25 put and long the $23 put. The maximium potential yield at expiration is 23.1%. The spreads provide a hedge of 3.1% at expiration between the share price at entry and the break-even level on the options.
I'll update this post after the FOMC announcement with my final decision.
References
My trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
At several points in my analysis I use the number 68.2%. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
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