Last week I laid out the bearish case for WYNN shares (see below), which was a mixture of macro, valuation, sentiment, relative attractiveness of long premium strategies, poor relative strength and most importantly the fairly horrible looking technical set up. In an effort to try to be disciplined on bearish trades, I have attempted to avoid trying to pick tops in strong stocks, and have waited to lay out shorts on rallies back to downtrends. In the case of WYNN, since their Q1 gap fill in early May, the stock has barely seen an uptick. Trying to do an outright bearish trade here seems a bit like a press, so I am going to look to finance the purchase of longer dated puts to account for the potential of near term decay in front of the long holiday weekend.
So here is the Trade:
Trade: WYNN ($201.30) Bought to Open the June / July 190 Put Spread for 2.35
-Sold to open June 190 Put at 3.00
-Bought to open July 190 put for 5.35
Break-Even on June Expiration:
-Profits are maximized at 190 on June expiration. Slight moves above and below that strike are also profitable with big moves higher or lower putting the structure at risk of losses on expiration.
-Max risk is 2.35
Rationale: WYNN 30 day implied volatility has come down substantially after earnings, even though recent realized volatility in the stock remains quite high:
[caption id="attachment_40722" align="alignnone" width="600"]
WYNN 30 day implied volatility (blue) vs. 10 day realized volatility (white), Courtesy of Bloomberg[/caption]
The put calendar is still long premium, but it does offer less risk than an outright put or put spread. So we are still long volatility in WYNN over the next couple of months, but somewhat mitigated in the short-term by the calendar if the stock is quiet.
As for the $190 strike, we chose that level as it is near the rising 200 day moving average as well as the low in the stock in 2014:
[caption id="attachment_40723" align="alignnone" width="600"]
WYNN daily chart, 50 day ma in pink, 200 day ma in yellow, Courtesy of Bloomberg[/caption]
We expect that support to act as a magnet on any further weakness.
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Original Post May 15, 2014: Name That Trade – WYNN’s chart is “a death trap, it’s a suicide rap”… you know the rest.
At one point in early March WYNN was up almost 30% on the year and up over 100% from the March 2013 lows. The stock’s price action has been a proxy for the prospects of their properties in Macau, which are largely levered to the economic healthy of China. While most Americans recognize the company’s flamboyant founder and CEO and their equally flashy Las Vegas properties, in the quarter just reported Macau accounted for 77% of their reported ebitda growing 14% year over year, while Vegas was down 1.5%. You get the point, this is all about growth in Macau.
While the data continues to be all over the place in China, the Shanghai Composite can’t get out of its own way, and is sitting on important technical support just above 2000:
Chinese equity investors domestically either have not gotten the memo, or don’t agree that the Chinese economy will NOT have a hard landing as they seem less than optimistic about the earnings prospects of the largest public companies in the country.
As for WYNN, the rally in Q1 might have been an epic blow-off top for a stock that has traded as if investors were valuing as a much smaller high growth company. In fact, after a share earnings rebound in 2013, analyst only expect WYNN to grow earnings 16% in 2014 and 10% in 2015, with large bump in 2016 when their new Cotai properties come on line (a few miles away from existing properties in Macau). WYNN trades at 22.5x expected 2014 earnings, with sales growth expected to be flat at 9%, while declining to 6% in 2015. This is the epitome of an overvalued stock that trades on the rosy prospects of a region that most sane investors take economic date with just a hint of skepticism.
On the technical front, regular readers will recognize the now infamous “Triangle of Death” that the stock appears to be doing its best to not breakdown from:
[caption id="attachment_40526" align="aligncenter" width="600"]
WYNN 1yr from Bloomberg[/caption]
The chart is a death trap, it’s a suicide rap … gotta get out while we’re young!
On the Vol front, despite 30 day at the money implied vol (blue below) being at the high end of the 12 month range (despite the recent spike with the stock’s decline from the highs) the stock has been moving quite a bit, with realized vol (white below) at the 52 week highs. This means that options prices are pretty reasonable, especially if you thought the stock was about to make a big move. Which if it broke 200 anytime soon could see a quick 10% decline in this trader’s opinion:
[caption id="attachment_40527" align="aligncenter" width="600"]
WYNN 1yr chart of 30 day at the money IV (blue) vs realized (white) from Bloomberg[/caption]
As has been the case with all of our triangle of death trades (WFM, COST & CRM) we want to be patient and try to short when the stock tests the uptrend, and not press when on the neckline. We will see how WYNN opens tomorrow, if we got a pop we would look for a trade to play for a break below 200.