Banker vs. player. Time to put the chips down. Bloomberg is doing some pretty interesting data mining here, so it might be time to consider how to play very big options skews on the downside in the Macau casino market, Galaxy in particular.
Yes, I know China is “slowing down” and that the regulatory pummeling isn’t likely to make the Chinese very enticed to go gambling, and they’re starting a smoking ban on the casino floors? People can take smoking breaks, the VIP lounges are small (meaning it’s easy to get away for a quickie) and the marathon gambling sessions with massive stacks happen pretty rarely in Macau – people run around with their chip purses and play for a handful per table, if they’re lucky they sit in for longer, if they’re not they will get a smoke to calm their nerves and I doubt a bit of an extra walk will hurt either them or the casino. (Currently you are not allowed to sit down on a table and smoke unless in the VIP lounges, but often that results in people simply standing around the table smoking instead. Making the whole area a no-smoke zone will definitely lighten the mood on the floors quite a bit!)
Well then, on to the technical analysis (courtesy of aastocks.com):
I’ll cover the three major behemoths here: SJM Holdings, Sands China Ltd. and Galaxy Entertainment Group. Largely because they have a greater mass-market appeal, the two latter have major Cotai projects and I find them overall to be rather well managed.
SJM will have to use a lot of price action to even challenge the monthly SMA, the Tuesday high will be relatively hard-fought by the looks of the ADX/DMI and the main MACD line still retreating. This is probably my best short at the moment, as much as I hate to say that about Macau’s truest mass market operator when China is limiting high roller spending. Still, look at the volume in this stock since mid September!
Sands China Ltd.:
I wouldn’t put it past this stock to do a short-term 10-15% jump to the quarterly SMA and flushing some positive momentum into the ADX/DMI, but finding a lot of resistance around HK$ 48-50 over there because of the massive resistance line at HK$50 and a decreasing major SMA. Going long with cheap options here is definitely my recommended play, and if it goes above 49 in October I would be willing to take an underlying short with a loss exit if the March-July peaks trend line gets broken, while exiting profitably at the monthly SMA.
Galaxy Entertainment Group:
Look at that support and hook action at HK$56! It will pretty effectively act as a resistance, especially considering the 3Q-1Y SMA cross in the near future, and both 1Q and 2Q SMA’s moving into the HK$56-60 range. Still, 56/48 – 1 = 16.7%! Getting 17% when only “paying” 36.4% IV for the first 10% is a pretty good position to be in!
So, what’s the tactic I would play here? (For new readers: this isn’t investment advice, if you invest based on this you deserve to lose money!)
- Go into an underlying short on SJM: it doesn’t look like it will see a runaway increase anytime soon. (30-50% of net position size).
- Long Sands China for [100% + Short money – 5%] and rent out the position for shorting to increase yield.
- Long calls on Galaxy with strikes around HK$50 (1 month to expiry) and HK$53 (2 months to expiry) at 2.5% of net position size each.
Strategically, In later stages I would kill the Sands position at HK$49 to go short as described above, possibly with killing the SJM short and going short Galaxy as well. If SJM shows some positive news any time soon, I am interested to see what the massive volume interest can do for it and would possibly go long at that stage – the market-negative sentiment it always brings with it would be pretty interesting to use for renting out my stocks for shorting and a market neutral-to-negative position here would probably be my goal from early-to-mid November.
I would really consider going net long again in 2015 if there are signs that the mass market is in full swing and good news come out of the CCP’s fourth plenum, with 100 of my underlying position being long Sands, with 10-20% of any earnings from this strategy prior to the new year going to an even split of long options in Galaxy and SJM, targeting April/May 2014 highs in two or three steps.