Do You Have the Guts to Bet on LeBron

It’s not often you get a trade tied directly to sports. But with the media frenzy surrounding NBA player LeBron James’ next move, which is supposed to be announced later today, we may just have one.

Media outlets reported on Twitter rumors yesterday that King James was going to end up at the New York Knicks, which would be a coup for Madison Square Garden, Inc. (NASDAQ: MSG). The new speculation is that he’ll likely stay in Cleveland or will head for Miami.

If you’re a betting man (or woman), this trade may be for you. But keep in mind that trying to predict the outcome (and effect) of an event like this is tantamount to calling a bookie and placing a bet on your favorite team.

Yesterday, we saw highly unusual options trading in MSG. That trading took place before the stock’s big move of more than 7% to $21.57 on about five times normal volume of over 1.7 million shares. The last time the stock saw such active trading was in April.

What is interesting here is that there was almost no pre-news buildup with active trading before yesterday, even though the potential Knicks destination was covered last week. An efficient market theorist would tell you it is a new development or that it was just another bogus rumor.

As far as the trade is concerned, shares are down 4% this morning as it seems less likely that LeBron will be wearing a Knicks uniform. On the surface, this almost seems like an instance where owning the in-the-money call is actually better than owning the speculative call, and there is no need to look beyond July with the announcement coming today.

The MSG July 20 Calls only cost $1.30 now that reality versus speculative hype has set in. With there being 60 cents of intrinsic value in this trade, you can argue that the real price is only 70 cents.

You could then also consider the much riskier proposition of selling the MSG July 20 Puts for 65 cents, which is a synthetic long strategy. Doing both trades as one almost becomes free on paper. The trick is the risk, as there is a lot of risk to mitigate there.

If the current belief is true that LeBron doesn’t end up in a Knicks uniform, then Madison Square Garden shares should settle back in around $20 to $20.20 where they were before the LeBron speculation caused the stock to go hog wild. If somehow LeBron does end up wearing a Knicks uniform, then the Garden’s shares could easily take out yesterday’s highs of $21.57 on the news.

After looking at all of the numbers, speculators would either sell the MSG July 20 Puts for that 65-cent premium on the bet that the shares won’t trade under $19.35 OR they would just go long the stock without all the hedges. Either way, the risk-reward scenario for a simple stock trade is more favorable than it was yesterday.

This is a simple trade idea. Betting on or against entire companies on a single athlete has proven more than challenging. Athletes rise and fall from grace, and they are notorious for blunders. Would you have ever believed that Tiger Woods would be such a tainted brand name this time a year ago?

That said, if you like betting on sports, this options trade may be the way to go.

Follow Jon Ogg on Twitter @jonogg.

The Secret to Money-Doubling Trades They Don’t Want You to Know
Professional traders Nick Atkeson and Andrew Houghton reveal their proven, time-tested strategy to finding money-doubling trades in a new report. It’s the trading “secret” so effective they were banned from sharing it with you. Download your FREE copy here.