Copyright Benzinga
MGM Resorts International (NYSE:MGM) may be one of the more conspicuous real-time indicators of the economy's bifurcated nature. While many investors are praising the stunning rise of the equities market overall — thanks mostly to artificial intelligence and similar innovations — consumers on the ground are clearly facing steep challenges. That may be one of the reasons why MGM stock responded disappointingly to the latest earnings report. Still, there may be a silver lining to consider. To be fair, MGM's third-quarter disclosure wasn't universally stellar, with the company delivering adjusted earnings per share of 24 cents, thereby missing Wall Street analysts' consensus target of 40 cents. However, the key metric that arguably should have been the focus was the top line, where revenue of $4.25 billion beat expectations calling for $4.23 billion. Moreover, this figure represented a 2% lift against the year-ago quarter. By segment, most of MGM's individual units moved higher on a year-over-year basis. Most notably, MGM China posted $1.1 billion in sales, representing a 17% lift from one year ago. Also, management noted that this unit enjoyed a record adjusted EBITDA for the third quarter, along with market share of 15.5%. Unfortunately, the one glaring miss came from Las Vegas, where the unit's $2 billion in sales translated to a 7% year-over-year decline. However, the business was impacted by a hotel room remodeling, which led to a decrease in revenue per available room. Despite the explanation, the resort operator struggled, with MGM stock losing more than 3% in the trailing five sessions. In the trailing month, it's down almost 8%. While the volatility hasn't been pleasant, the red ink may also be hiding a quantitative reversal signal. Using Real Science To Trade MGM Stock In all of science, center of mass represents a fundamental concept. Whether you're talking about classical mechanics to engineering structures to planetary systems, it's a key defining property. It also stands to reason, then, that intangible objects — such as a distribution of data — also has a statistical center of mass, so to speak. In the case of the financial markets, we can use terms like price clustering or density. By understanding where a security is more likely to cluster, we can then better determine the viability of particular options strategies. Even better, we know through GARCH (Generalized Autoregressive Conditional Heteroskedasticity) studies the diffusional properties of volatility as clustered, non-linear phenomena. To put this in colloquial terms, different market stimuli yield different market results. This is the beauty of quantitative analysis: it follows an organic mathematical logic. Through rise-over-run-style formulations, we can easily calculate the forward distributional profile of a particular security (so long as there's enough price history data). But since we also know about volatility diffusion, we can also calculate conditional distributions associated with specific market signals. Under baseline conditions, the projected 10-week returns of MGM stock would be expected to form a distributional curve, ranging mostly from roughly $31.40 to $33.10 (assuming an anchor price of $31.77). Further, price clustering will be most prominent at around $32.30. However, the argument here is that MGM stock is not in a baseline state but is rather under a 4-6-D sequence: in the trailing 10 weeks, the security printed four up weeks, six down weeks, with an overall downward slope. Here, the risk-reward spectrum expands to $31.20 on the low side to $34.65 on the high side. Price clustering would be expected to be predominant at $33.25. Primarily, the key takeaway here is that there's a 2.94% positive delta in price density dynamics that traditional methodologies — such as fundamental and technical analysis — are completely blind to. That's absolutely wild but that also means you can exploit this informational arbitrage. Putting The Data To Practical Use Based on the data above, the trade that arguably makes the most sense when balancing payout with probabilistic success is the 31/35 bull call spread expiring Dec. 19. This transaction involves buying the $31 call and simultaneously selling the $35 call, for a net debit paid of $197 (the most that can be lost in the trade). Should MGM stock rise through the second-leg strike ($35) at expiration, the maximum reward stands at $203, a payout of 103%. Breakeven lands at $32.97, which is a realistic target considering the aforementioned price clustering data. To be sure, there will need to be some luck involved in this trade. The terminal median price should land around $33 at the time of expiration, which means that half of outcomes would land above $33 and half below. However, based on traditional methodologies, there's around a 41% chance of the 31/35 bull spread breaking even. I'm disputing this calculation because the quantitative data suggests that the "actual" probability is greater than 50%. That's where the informational arbitrage lies. It's a risky play but it's also enticing because no one is talking about it. The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions. Read More: Options Corner: United Parcel Service’s Earnings Beat Opens The Door For A Quick Strike Image: Shutterstock
