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Trades

A New Sports Betting Partnership Worth Billions

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Making money off someone else’s sins is not a new idea. For years, some of the best industries to grow your money have been tobacco and alcohol. Now, many feel cannabis is the new “sindustry” worth investing in.

But there’s another niche market that has been around for as long as written history and has been a fantastic way to make money – if you know what you’re doing.

Gambling, more specifically, sports betting is one of the fastest growing industries in the world. From 2009 to 2016, this market doubled in size, from $20 billion to $40 billion. It could have already hit $60 by now. And that’s just the legal sales side of it.

While this previous growth has been exciting for anyone already invested, something new is coming that could send these numbers up even faster.

Just this week, investors got news of a partnership between Scientific Games (SGMS) – a gaming systems management company – and Wynn Resorts – one of the largest casino owners in the world. The deal is to help one another create and market new sports betting platforms and mobile applications.

News sent both companies up this morning. But even so, it doesn’t seem investors are seeing the full picture here.

You see, Scientific Games is a huge company that has perfected everything from slot machines in casinos, logistical player tracking and patterns to scratch-off lottery tickets and marketing. But over the past few years, another drastic shift in consumer habits has helped this company take off: mobile gaming.

Scientific Games has designed dozens of mobile games for those with a penchant for gambling while they play. The company has interactive systems to play these same games in and out of casinos… on all kinds of platforms.

Wynn, as I’m sure you are aware, is a giant in the casino industry. Steve Wynn, the company’s founder, has been in hot water over the last year. He has been accused of dozens of sexual misconduct allegations, forcing him to resign from his position with the Republican National Committee.

His former company, which still bears his name, is now even trying to ban him from its properties. But Wynn Resorts is not Steve Wynn. And it isn’t even the best way to play this huge growth industry… or this new deal.

Instead, this partnership is finally putting investor eyes on Scientific Games, which has already been making its mark in its industry. Now, those that don’t follow gambling or casinos are seeing it for the first time.

The deal’s details haven’t been disclosed. It appears to be simple partnership to grow both company’s sports betting businesses. And because of the controversy surrounding Wynn, this deal offers short-term profit opportunities.

Shifting Sands in the Sports Betting World

Sports betting’s recent growth has been in part attributed to the explosion in fantasy sports. We all know someone that spends way too much time perfecting his or her fantasy football or baseball team. What was once a nice friendly game similar to filling out a bracket for March Madness has turned into an obsession.

Big money didn’t take long to find its way into this fad. Daily fantasy sites Fan Duel and DraftKings have swelled over the years with millions of users. For a while, everything was going perfectly for these two dominant players. In many ways, it still is. But now states are starting to catch up to this new industry.

States all of the country, from Illinois to Alabama have started putting together legislation to curtail this market. New York is even taking these two sports betting giants to court. Now, it’s impossible to know what will come out of all of this. Whether these companies will have to change or not might not even be the right question to ask.

Clearly, there’s huge demand for interactive and live sports betting online. Casinos have known this for years. Wynn itself already has a large sports betting business. But the idea of making this all connected, interactive and online, without needing to fight the battles daily fantasy companies are dealing with seems like a win-win.

Obviously, there’s money to be made here. But again, no one can predict the future. So, we options traders like to take a different approach… a more cautious one, without giving up much upside potential. Fortunately, there’s a play for exactly that.

A Strategy For Short-Term Bulls

A bull call spread is a type of options trade that lets traders use the power of options leverage to seek a large short-term profit, without risking as much as a straight call trade.

The way it works does start the same way. Buy a call option on a stock you believe is going to go up in price. But then, instead of just leaving it at that and hoping for the best, a bull call spread involves selling a second call option on the same stock.

This reduces your risk. The income received from the second call helps cover much of the cost of the first one. This reduces both the cost basis of the trade and the total amount at risk.

In exchange for that, it does cap how much could potentially be made from the trade in the end. But unless shares of the underlying stock were set to skyrocket double or triple digits on their own, most option traders are smart to make this extra move.

You can see how this kind of trade looks here:

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Source: The Options Industry Council

This strategy is perfect for Scientific Games. The company is smaller, and less known. Meaning it can shoot up pretty fast. But, because of its size, overall risk is generally higher. This strategy helps reduce that risk, while offering a better than equal return potential.

Take a look at a specific trade using this strategy on SGMS, and see for yourself.

A Specific Trade For SGMS

Right now, a trader could by a July 19 $22 call for $3 per share and sell a July 19 $24 call for $2.30 per share for a total cost of $0.70 per share. Since each represent 100 shares of SGMS, that’s a net debit of $70.

That’s the most the trader would have to lose if this trade turns south. If this deal falls through or doesn’t produce the kind of investor enthusiasm we expect, the trader would only have that at risk. As you can see, that’s far cheaper than the $230 a straight call option bet would cost.

And the tradeoff isn’t bad at all. To find the maximum potential gain here, take the difference in strike prices ($24 – $22 = $2). And subtract the cost ($2 – $0.70 = $1.30). Again, on 100 shares of SGMS, that’s a potential profit of $130.

So, for this play to work out to the trader’s maximum benefit, he’d make $130 on the total risk of $70… or a 186% return on the amount at risk.

To see every dime of this, shares of SGMS would have to go up to $24 from here… or about $1.50 from here. But considering that they jumped that much just at today’s open, it is more than likely we’ll see that by July.

1 Comment

  1. RODERICK GROOMS Reply

    I would to purchase your Consulting in stock options. I would love to have returns like that in my account.

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