MGM Mirage (NYSE: MGM) and Dubai World announced this morning they would launch a cash tender offer to buy back up to 10 million MGM common shares for $75 to $80 each. The companies' decision came on worries that an economic slowdown will lower demand for gambling. If you think that the company won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on MGM.The stock hit its 52 week high of 100.50 in October and set its 52 week low of 59.74 in January. MGM opened this morning at $73.71. So far today the stock has hit a low of $71.82 and a high of $74.29. As of 12:40, MGM is trading at $72.43, up $2.45 (3.5%). The chart for MGM looks bearish and steady while S&P gives MGM a neutral 3 STARS (out of 5) hold rating.
For a bullish hedged play on this stock, I would consider a March bull-put credit spread below the $60 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. This particular trade will make a 12.4% return in just 10 weeks as long as MGM is above $60 at March expiration. MGM would have to fall by more than 17% before we would start to lose money.
MGM hasn't been below $60 since December of 2006 and has shown support around $70 recently. This trade could be risky if the economic slowdown causes fewer people top gamble, but even if that happens, this position could be protected by the support the stock might find around $70, where it has bounced twice in the past 5 months.
Brent Archer is an options analyst and writer at Investors Observer. At publication time, Brent neither owns nor controls positions in MGM.
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