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Melco Crown Calls Jump to Eight-Month High on Project

Melco Crown Entertainment Ltd. options traders pushed bullish bets to the highest level since May in the U.S. after shares rose on speculation the Macau casino operator is getting a loan to fund a new project.

Almost 27,000 calls to buy Melco’s American depositary receipts changed hands on U.S. options exchanges on Jan. 20, or 11 times the four-week average and 28 times the number of puts to sell, according to data compiled by Bloomberg. Melco’s shares rose 1.2 percent to a two-month high of $11.31 in New York, extending this year’s gains to 18 percent.

Melco Crown, a venture between billionaires Lawrence Ho and James Packer, approached banks to finance the company’s Studio City project in Macau, the world’s largest gambling hub, four people familiar with the matter, who asked not to be identified because the details are private, said last week. The loan may be about $1.25 billion, two of them said. The week-long Chinese New Year holiday, one of Macau’s busiest periods, begins today.

“Expectations for stronger gambling revenue numbers this month would be good news for the company and could be partly the reason,” for the jump in the calls contract, Frederic Ruffy, senior options strategist at Whatstrading Co., a New York-based provider of options-market analytics, said by phone on Jan. 20.

Melco’s most-active contracts were April $14 calls, accounting for more than half of the call volume after a single trade of 12,623 contracts that will pay should the shares rally 25 percent in three months. Before Jan. 20, the April $14 calls had an open interest of 749 outstanding contracts.

Casino Revenue

The April calls jumped because they are the only contracts that expire after Melco releases earnings on Feb. 22, Ruffy said.

Melco’s fourth-quarter sales probably rose 26 percent from a year ago to $972 million, according to the average estimate of eight analysts surveyed by Bloomberg. Net income more than tripled to $56.9 million, analysts predicted.

Casino revenue in Macau, the only place in China where public gambling is allowed, rose 25 percent in December to 23.6 billion patacas ($2.95 billion), according to data from Macau’s Gaming Inspection and Coordination Bureau.

Gambling revenue more than tripled in the past four years as Chinese tourists flocked to the enclave and spent more money.

Cameron McKnight, an analyst at Wells Fargo & Co. reiterated an “outperform” recommendation on Melco Crown stock on Jan. 20. The average 12-month price target for the company’s American depositary receipts is $14.31, according to the median estimate of 18 analyst predictions compiled by Bloomberg.

Market ‘Cannibalization’

Macau’s gaming operators may face “more serious cannibalization” of their markets in the next two years as more casinos open, according to a Jan. 22 report by Goldman Sachs Group Inc.

Studio City will be an integrated resort with a “theme and demographic focus” aimed at differentiating it from the company’s existing portfolio of assets, according to Melco Crown’s website. Melco is about three to four weeks away from hiring banks, the people said.

Options are contracts that give the right though not the obligation to buy or sell a security at a set price and date.

Calls give the right to buy a security for a certain amount, the strike price, by a set date. Puts convey the right to sell. Investors use options to guard against fluctuations in the price of securities they own, to speculate on share-price moves or bet that volatility, or stock swings, will rise or fall.

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