Betting on downside in Las Vegas Sands (NYSE: LVS)

Las Vegas Sands (NYSE: LVS) shares zoomed almost 5% higher in Wednesday’s trading, hitting a new six-month high intraday and closing the session at $19.73. Catalyzing this upside was news that Nevada gaming revenue slipped 3.2% in January on a year-over-year basis. While declining revenue is never good news, these results appear to be better than the Street was expecting, as the casino sector posted some gains on the day.

While LVS shareholders were celebrating the stock’s encroachment on the 20 level, options traders were rushing in at the eleventh hour to place a bearish bet. About 45 minutes before Wednesday’s close, large blocks changed hands at the January 2011 20-strike put. By the closing bell, 10,504 options had traded versus open interest of 12,364. Open interest sits at nearly 21,000 today, indicating that the large majority of this volume opened as new positions.

One question for followers of options activity is whether the positions in question were bought or sold? There are a couple of ways to make an educated guess. First is a look at the trading price. These puts traded at $4.10 per contract, which was near the ask, or offer, price at the time. Typically buyers execute trades at or near the ask price and sellers execute at or near the bid price. This is true whether positions are being opened or closed.

Another way to help determine a trader’s intentions is to look at the movement in the option shortly after the block in question crosses to the tape. For example, last night at the close, the January 20 puts were down just 25 cents despite an 88-cent rise in LVS shares. With a delta of 41%, these puts should have lost about 36 cents, but what we believe to be buying momentum effectively raised the cost of these puts.

If in fact the trader was buying these near-the-money puts, he is likely expecting downside in LVS shares. If held all the way until expiration, these puts could gain as much as $15.90 (in the unlikely event that LVS falls all the way to zero), while the maximum loss is the amount paid, or $4.10 per put contract. Breakeven at expiration is $15.90 (the strike price minus the debit paid) and represents a 19.4% drop from current levels.

LVS is expected to report earnings on or around May 5th. Check out the latest LVS news, experiment with different options strategies, and keep track of implied volatility movements with a free virtual trading account .

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