New Trade WYNN – Macau Harvesting Flies

by Enis October 4, 2012 10:56 am • Commentary

WYNN is in the betting game.  It’s one of the largest casino operators in the world, and heavily levered itself in the last bull market, that the stock had a major debt problem when the market crashed.  However, those big bets, especially on Macau, have paid off over the past few years.  The 10 year stock chart sums it up well:



The stock has transformed itself from a purely U.S. operator to a big Chinese player.  75% of WYNN’s revenues are from Macau!  The baccarat players of Macau have been a huge boon for Steve Wynn and his casino empire.  But as China has slowed in the last year, the gamblers in Macau have pulled back the reins on their spending, both at the casino tables and in the high-end shops around town.

Last night was the latest data point that the slowdown in Macau is not over.  Gambling revenue in Macau rose 12.3% in September, less than the 15-17% expected by analysts.  September’s revenue of around $3 billion was the second weakest monthly figure of the year (as reported by the Macau government).  Visitor levels from the mainland have been trending lower all year, as the rich Chinese tycoons cut back on conspicuous consumption and halt spending as business slows.

WYNN’s growth story is directly tied to China.  While the company partly blamed weak Q2 results on bad luck in the casinos (low “capture” rate, meaning the house won less than the probabilities would dictate), part of the weakness is also due to general Macau weakness.

Q3 earnings are going to come out later this month.  The options market is pricing it like the report will be before Oct 19th expiry.  Expectations have been lowered, but with a P/E above 20, WYNN had better show some potential growth going forward, or the stock is likely to be slammed back down to 100 after the report.  

Implied vols are expensive in October ahead of the report, but I want to initiate a small position today in case the stock starts to sell off into the earnings report (and today’s Macau data could be the start of a sentiment shift for the stock).  WYNN has been down on the past 5 earnings reports, so I think traders might anticipate that weakness, heading into this quarter’s report.  I will re-assess the trade once we are a couple days before the report.

TRADE: WYNN ($113.20) Bought Oct / Nov 105 Put Calendar for $1.40

-Sold 1 Oct (regular expiry) 105 put at $0.75

-Bought 1 Nov 105 put for $2.15

TRADE RATIONALE:  This structure gives me some short delta at initiation today, so I’ll participate in downside over the next couple weeks, but I don’t have to worry about theta decay in the meantime.  It’s a low risk way to give me some downside exposure for a potential decline in the next 2 weeks heading into the earnings report.