Considering Our Options – $WYNN: Thoughts Ahead of Earnings on July 29

by Dan July 25, 2014 2:40 pm • Commentary

We put on a new trade structure in WYNN on Monday as the stock’s trading range continues to narrow over the past few months:

WYNN daily chart, 200 day ma in yellow, Courtesy of Bloomberg
WYNN daily chart, 200 day ma in yellow, Courtesy of Bloomberg

This was the structure:  

Trade: WYNN ($201.50) Bought July 25th (weekly) 195 / Aug 16th 200 Put Diagonal for $5.50

Today, the Jul25th 195 put is going to expire worthless, so we are just long the Aug16th 200 put.  The company reports earnings on Tuesday morning before the open.  We are going to revisit the position on Monday, and will update the trade if we decide to sell a lower strike put against our long Aug16th 200 put position.  WYNN has averaged a move of 4.5% on earnings (which is about $9 at current levels) over the past year, and the implied move next week is about 4%, so options are priced relatively fairly ahead of the event.

At the moment we are going to leave the Aug16th 200 put as an outright long.


New Trade – $WYNN: We Are Nothing If Not Persistent

In late May, when WYNN was trading at the exact same levels it is today, we laid out our bearish thesis for the stock and executed an options trade that looked to help finance owning puts for what we thought would be an eventual technical breakdown below $200 (read below, from the bottom up).  The stock has traded in a fairly interesting range since, as high as $220 and as low as $193.50, but mainly straddling $200.  Our trade expired worthless on Friday’s expiration, losing the premium, which was less than 1% of the stock’s price.  As far as losers go, that’s about as palatable as it gets.   But now we want to roll this view in front of the company’s Q2 results expected some time in the next 2 weeks (it has not been set yet, IR page here).

So let’s take a score card – Macau data has not gotten better, and the impending smoking ban in the fall could put a dent in forward guidance.  Las Vegas Sands reported worse-than-expected results in Macau on Thursday, which hit both LVS and WYNN last week.  That is especially concerning for WYNN since it is more concentrated in Macau than LVS.

The technical set up is worse than it was in May.  Why you ask?  Because the stock has been unable to rally, even with broad market strength, and seems poised to break its 200 day moving average to the downside for the first time since December 2012:

[caption id="attachment_43172" align="aligncenter" width="600"]WYNN 2 year chart from Bloomberg WYNN 2 year chart from Bloomberg[/caption]

WYNN reports earnings in late July.  The bar is relatively high since WYNN had a bad Q2 in 2013, so analysts are expecting 34% year-over-year EPS growth in 2014, on only 7% yoy sales growth.  Margins will be a key issue as a result.  Analysts expect WYNN’s margins in Macau to improve as the casinos start to cater more to the mass market gaming demographic (as opposed to just the VIPs), but that shift might be rockier than expected based on the LVS report.

Given the concerning technical backdrop and a fundamental situation that includes high expectations and a shifting customer base, we want to give our bearish thesis another chance:

Trade: WYNN ($201.50) Bought July 25th (weekly) 195 / Aug 16th 200 Put Diagonal for $5.50

-Sell to open 1 July 25th 195 put at .75

-Buy to open 1 Aug 16th 200 put for 6.25

Break-Even on July 25th (weekly) Expiration:

Max profits with stock at $195 on July 25th weekly expiration

Rationale:   The idea here is to give ourselves a little room on the entry of the bearish trade.  However, rather than our classic put calendar, we decided on the put diagonal.

There are three main reasons why we like the put diagonal structure for this specific situation:

1)  The implied volatility for Jul25th expiry is actually above the implied volatility for Aug16th expiry.

2)  We want to buy optionality overall because WYNN is right at its 200 day moving average, so we think the potential for a big move on a technical break is higher than normal.

3)  Given the technical situation, WYNN might break lower even without any news or earnings event, in which case we wanted a structure that was shorter delta than a put calendar, but more flexible than an Aug16th put spread.

Our main risk on this trade is still that WYNN moves higher from here.  By selling the weekly 195 put, we do take away some of the potential upside if WYNN has a big move below 195 this week, though we will still be profitable on our trade structure below $195 in most situations (since intrinsic value is $5).

This trade is a bit more advanced, and we will be sure to update it later this week depending on how the stock behaves this week.





Previous Post June 2oth, 2014:  Trade Update $WYNN: Rolling Short Leg of Put Calendar

Back on May 20th we initiated a bearish put calendar in WYNN (see below), short June and long July. Since then the stock is in the exact same spot it was then, after first rallying hard and rendering the trade a loser and then falling hard making the trade a winner.  Now the position is essentially unchanged and we are going to roll the short leg that will expire worthless on today’s close in an effort to further reduce our break-even:

To refresh, here was the trade from May 20th:

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

Now with the stock at $201.22, the July 190 put that I am long is worth about 2.30 which makes the trade about even.  I want to now sell a lower strike put of a different expiration to help offset decay as I wait for what I deem to be the next catalysts for the stock, June Macau gaming revenues which have been disappointing the last couple of months.

Action: Sell to Open WYNN ($201.20) July 3rd (weekly) 190 put at .80
New Position: Long WYNN ($201.20) July 19th (regular) / July 3rd (weekly) 190 Put Spread for 1.55

Rationale: The stock has been weak relative to the broad market, and despite the late May push to $220, the rejection there, and the fact that it made a new low suggests that the stock is poised for a breakdown on the slightest bit of bad news.  I am selling the July 3rd weekly because it will NOT capture the June Macau data.  And if we get to Thursday July 4th and the stock is lower I will look to once again spread the July 19th puts that I own into the following weeks data.

And lastly, the technical set up looks poor.  The stock has made a series of lower lows, continues to show poor relative strength, and now sits right above massive support at $200, and right in the middle of the 50 day moving average (purple) that it was rejected at yesterday, and the 200 day moving avg (yellow) that it bounces off of on Wednesday:

[caption id="attachment_42016" align="aligncenter" width="600"]WYNN 6 month chart from Bloomberg WYNN 6 month chart from Bloomberg[/caption]

I like pressing this one with defined risk, but I really liked how I have whittled down the cost of the July 190 puts from $5.35 on May 20th to 1.55 today.  Now all I need is the little task of the stock collapsing to $190.




Original Post May 20th, 2014: New Trade – Just WYNN Baby

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 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 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.




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:

[caption id="attachment_40525" align="aligncenter" width="600"]2yr Chart of SHanghai Comp from Bloomberg 2yr Chart of Shanghai Comp from Bloomberg[/caption]

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.  [private]

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 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 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.