The stock price rose by 8.5% over the 44-day life of the position, or 70.2% annualized. The options produced a 21.1% yield on risk, or 174.6% annualized.
Update 12/5/2013: I've opened a bull position in LVS, structuring it as a bull put spread, with 2:1 leverage and maximum yield on risk at expiration of 21%. The position provides a 5.4% hedge of profitability below the entry price.
The short puts have a 65% chance of expiring in the money, making this a high-probability trade.
Las Vegas Sands Corp. (LVS) is completing an uptrend that began Nov. 20 from $68.90.
Using Elliott wave analysis, I calculate that it has no more than 6.7% of headroom before hitting a limit and correcting to the downside, and the decline could come before the limit is attained.
The chart also shows a larger uptrend beginning June 24 from $47.95. Once the smaller correction is complete, there is no limit to the rise that will follow. That's not to say that the stock will go up forever, only that the Elliott wave rules impose no stopping point.
Click on chart to enlarge.
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| LVS 180 days 4-hour bars (left), 20 days 20-minute bars (right) |
At the highest degree I counted, LVS began an uptrend from $34.72 on July 2, 2012. The final correction of that rise, wave 4 {+2}, ended on June 24 and marked the beginning of wave 5 {+2}, and at lesser degrees, wave 3 {+1}.
Wave 5 {+2} has completed two bull signals, one successful and one not. The winner yielded a satisfying 16.5% over 46 days. The loser shed 4% over 18 days
Nearer term, LVS is trading wave 5, my base degree on this chart, which began Nov. 7 2013 from $68.19.
It is at the base degree level that the limit occurs. Elliott wave rules assert that the third wave cannot be shorter than both the first and fifth waves; i.e., it can't be the runt of the litter. Wave 3 was shorter than wave 1 by $1.85.
Wave 5, then must come in shorter than wave 3 to avoid violating the rule, setting a maximum target of $79.33. Wave 5 may fall short, but under my preferred count it must not move above that level. If it does, then my count is wrong.
So the base degree, the most appropriate trend level for my style of trading, is well advanced. Yet one degree lower, and the count shows the rise to be in its middle stretch, as wave 3 {-1}.
Waves at my base degree level tend to last week rather than months or days. I judge 6.7% to be sufficient headroom for a profit. However, any position in LVS at this point will require the trader to keep close watch on the chart, as the waves of lesser degree unfold.
Las Vegas Sands, headquartered in Las Vegas, owns what it calls "destination properties", created spaces where people go because they were designed to draw them in (as opposed to, say, the Grand Canyon or Victoria Falls, destination of a more sublime sort). The company has destinations in the United States, China and Singapore.
The U.S. holdings, including two major hotel/casino properties in Las Vegas, are dwarfed by the company's Asian properties, which account for 83% of market cap. In a very real sense, LVS is a China play.
Analysts collectively come with an extremely high 69% enthusiasm rating for Las Vegas Sands' prospects.
The company reports 26% return on equity but by my standards falls short of growth-stock territory because of the long-term debt, which amounts to 92% of equity.
Earnings the last two quarters have come in higher than their year-ago counterparts, following four quarters of lower than year-ago earnings.
The company has surprised to the upside seven times in the last three years, and to the downside five times.
Earnings yield is 3.46%, lower than 80% of other casino and gaming companies. The stock is priced at 29 times earnings.
Institutional ownership is rather meager, at 39% of shares, which are priced at a premium to sales. It takes $4.63 in shares to control a dollar in sales.
LVS on average trades 3.7 million shares a day and supports a very wide selection of option strike prices spaced $2.25 and $2.75 apart near the money, with open interest running to three and four figues.
The front-month at-the-money bid/ask spread on calls is extremely narrow at 0.3%.
Implied volatility stands at 29%, the peak of a rise from 25% on Nov. 27. Volatility stands at the top of its one-month range, suggesting that short positions, such as bull put option spreads, sold for credit and expiring in January, provide the highest chance of success.
Options are pricing in confidence that 68.2% of trades will fall between $69.11 and $81.81 over the next month, for a potential gain or loss of 8.4%, and between $72.41 and $78.51 over the next week.
Contracts are trading heavily today, with both calls and puts running at about double their five-day average volume.
Las Vegas Sands next publishes earnings on Jan. 27. The stock goes ex-dividend on Dec. 18 for a quarterly payout yielding 1.85% annualized.
Decision for my account: The risk of trading a fifth wave is that has moved beyond the end of the preceding third wave is that it can stop its rise and reverse at any time. Or, it can continue to rise -- there's no way to tell.
In taking this risk, I'm relying on my exit rules to tell me when to get out and the availability of a hedge to extend my zone of profitability below the entry price.
I intend to open a bull position in LVS if it continues its upside momentum in the last half hour before the closing bell. If momentum falters, then I'll add the symbol to my Watchlist.
References
My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.
I use the number 68.2% in using applied volatility to calculate the expected trading range. 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.
Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading.
Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.
See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.
By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.
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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