Bulls cash in their chips with $MGM

MGM Resorts (MGM) popped today on news of a new stake from IAC (IAC), sending huge gains to upside option traders’ calls.

On Aug. 6, Market Rebellion’s Unusual Activity Service flagged the purchase of 2,500 14August $18 calls for $0.30 to $0.45 with shares at $17.36. This was clearly fresh buying, as open interest in the strike was just 1,965 contracts before the trades occurred.

Those calls sold for as much as $5.75 today, at least 12.5 times their purchase prices. The stock rose 36.58% in the same time period, illustrating how options can far outperform moves in their underlying shares on a relative basis.

Long calls lock in the price where investors can buy a stock, letting them position for a rally at limited cost with the potential for significant leverage. They carry less risk than owning shares because the most that can be lost is the price of the options no matter how far the stock might fall.

MGM popped higher, ending the session higher by 13.83% to $21.65 after IAC (IAC) announced a $1 billion stake in the casino.