Update: Placing My Chips on a Near Term Short on WYNN

by Dan October 19, 2011 2:10 pm • Commentary

Update Oct 19th 2011: Since putting on the Oct 120/110 Put Spread nearly 2 weeks ago WYNN is practically in the same place, while the spread has lost about 1/2 its value, now with stock ~$132 the put spread is worth about .80 (originally paid 1.60).  As we head into tonight’s earnings announcement, the implied move has creeped up a bit to about 6.5% which is rich to the 4 qtr avg move of about 4.25%.  For this spread to even break even I will need a massive move on earnings which to be very frank I am not expecting….when I put the trade on I was looking out to some Chinese economic data (GDP released early this week) that would help catalyze the stock lower towards the long put strike that I own…..China GDP came out mildly weaker than expectations and WYNN Macau has been down about 12% in Hong Kong this week in sympathy (the focus on china is because WYNN gets a disproportionate amount of their earnings from Macau, which is heavily dependent on Chinese tourism)…..

So what to do now with a broken trade? if the earnings don’t cause the stock to break 120 tomorrow then this spread will quickly be rendered worthless with just 2 days left to exiration…..so I have 2 choices, 1st take the .80 and move on or roll the strikes down…….at this point I am going to close the position….check back on quick hits in the next 45min…I am looking at other structures that would maybe benefit from a 5% move lower….

 

Original Post Oct 7th, 2011: Placing My Chips on a Near Term Short on WYNN

Here is a quick preview of what I will be speaking about tonight on Options Action at 5pm on CNBC:

WYNN has been particularly volatile of late and fears about China’s economy slowing as the company gets about 70% of their earnings from Macau.

The stock is down almost 25% from the July high made following their strong Q2 earnings report, but still up about 25% on the year. The stocks recent range from 160 to 110 back to 130 in a little more than 2 weeks is the sort of stuff that options traders dream of.  Implied Volatility is through the room with at the money 30 day implieds offered at about 70 vs the 30 day and 60 day realized volatility of about 65 and 55 respectively……

As the macro focus briefly shifted from Europe to China in the last couple weeks, casino operators heavily exposed to Macau were the obvious choice for shorts.

In the coming weeks there will be plenty of economic data coming from China that could push this stock back towards this past weeks lows around 110.

On Oct 13th we will get inflation data from China in the form of their CPI and PPI, and on Oct 17th we will get GDP and Industrial Production.  Any signs of a slowdown and it could be lights out for names like WYNN in the near-term.

Technically the stock has broken a big support level and made a few closes below the neckline of a significant head and shoulders top only recently to rebound back to the level…..

1 YR WYNN Chart from Bloomberg

 

Credit Suisse this morning upgraded the stock to an Outperform from a hold and the stock is still down…..CS had the following to say about the name:

Why are we upgrading now?

Long-term Macau story unchanged despite China slowdown concerns Investors have penalized Macau-related gaming stocks in recent trading sessions given concerns about a potential GDP slowdown in China. We can understand that investors would be skittish around the Macau gaming stocks after a terrific growth run and results that have continuously exceeded expectations YTD. Clearly, comps could get more challenging in 2012, and any perceived slowdown, even if growth continues at a 25%, 30% pace might not be enough to satiate expectations. Generally speaking, we believe a more gradual slowdown in comps, rather then a dramatic deceleration is what most

 

MY VIEW: technically the chart looks broken near term and the least bit of bad news either specific to the company or macro from China could see investors take flight given the names healthy valuation to its peers and it’s reliance on ASIA.  I want to make a short term bearish bet, while defining my risk through Put Spreads,  This is not a stock you want to be short if the market has bottomed…..

TRADE: WYNN $132 BUY OCT 120/110 Put Spreads for 1.60

-Buy Oct 120 Put or  2.80

-Sell Oct 110 Put at 1.20

Break-Even on Oct Expiration:

Profits: btwn 118.40 and 110 make up to 8.40, below 110 make full 8.40

Losses: btwn 118.40 and 120 lose up to 1.60 and above 120 lose 1.60

TRADE RATIONALE:  while this spread is a good bit out of the money, I am isolating a level that the stock traded to just this week on China wekness concerns…I think that with all the important data to come there is a good chance that if the data is weak the stock will test these levels again.  I don’t have a lot of time to get this right and will not look to hold to expiration….