Considering Our Options – $WYNN Dec/Jan Put Calendar

by Dan December 3, 2014 12:06 pm • Commentary

A few weeks ago we initiated a trade in WYNN that had very little delta exposure, but looked play for a near term consolidation through December expiration around $180, but looked to set up to own near the money Puts into the new year to capture December Macau results.  It turns out that we might have gotten too cute with the trade structure in an attempt to thread the needle, but financing at the money puts.  The recent weakness is the combination of poor relative strength and techncials, but also a couple negative headlines on the fundamentals of the company (the first one was about an hour after we printed the trade!).

At this point we need to keep this trade on a tight leash. At this point the best case scenario for the trade would be a move back to our 180 strike. The worst case is a continued breakdown causing the premium difference between the put that we are short and the put that we are long in Jan to narrow (as both approach parity) resulting in further losses.

Right now with the stock at $170 the trade is worth about $1.30, we paid $2.10. If the stock continues to break down from this level we’ll have to pull the plug and salvage what premium we can. Any bounce from here and we can probably be patient.




New Trade – You $WYNN Some, You Lose Some

Shares of Wynn Resorts (WYNN) went from a massive outperformer in the first qtr of 2014 (up 30% on the year at one point) to its current “left for dead in a raging bull market” state. It’s currently hanging on for dear life just above the important near term technical support of $180:

WYNN ytd chart from Bloomberg
WYNN ytd chart from Bloomberg

It’s important to note that WYNN has not been correlated to the S&P500 in 2014, or to Chinese equities for that matter. The Shanghai Comp is up 15% ytd and the Hang Seng is flat while WYNN has had a 6% decline.  The company, which gets close to 70% of its sales from Macau, is obviously levered to the health of a Chinese economy that has not exactly had the healthiest readings of late.

Macau has been particularly weak as the Chinese government has cracked down on corruption at the same time that the Hong Kong protests hurt demand. October was a terrible month for the casino business in Macau, as outlined in a Bloomberg article 2 weeks ago:

Total casino revenue in the world’s biggest gambling hub fell 23.2 percent to 28 billion patacas ($3.5 billion) in October, dropping for the fifth straight month, according to Macau’s Gaming Inspection and Coordination Bureau yesterday.

Macau’s casino gambling revenue is expected to keep declining until mid-2015, when casino operators start opening new properties, Barclays Plc analyst Phoebe Tse wrote in a note yesterday. Full-year revenue should slump by 1 percent, she said, making it the industry’s first annual decline in the city.

On a longer term basis, the stock has held the uptrend that has been in place since the 2012 lows (representing 100% gains.)  However, the longer the stock displays waning momentum, the greater the potential for a break lower:

WYNN 3yr chart from Bloomberg
WYNN 3yr chart from Bloomberg

Here is the chart that really sticks out to me.  Implied Vol (blue line below) vs Realized Vol (white line).  Basically, the price of options compared to the movement of the underlying stock:

WYNN 1yr chart of 30 day at the money IV (blue) vs 30 day relaized vol (white) from Bloomberg
WYNN 1yr chart of 30 day at the money IV (blue) vs 30 day realized vol (white) from Bloomberg

Options prices are cheap, less so when compared to the the low level of movement in the stock. But I suspect that with the turn of the calendar we could see greater volatility in equity markets.  In that case, stocks like WYNN that have the propensity to be very volatile and are levered to macro concerns like global growth could be attractive volatility to own after New Years.

However, the market seems like its going nowhere into year end and it therefore makes sense to finance any January premium purchase by selling December:  

TRADE – Buy WYNN ($180) Dec/Jan 180 put calendar for 2.10

– Sell to open 1 Dec 180 put at 4.90

– Buy to open 1 Jan 180 put for 7.00

Breakevens: This is a trade that benefits from sideways movement in December. At December expiration if the stock has not moved much from the 180 strike, this trade will be profitable. At that point a decision can be made to either take the trade off for a profit or roll the short strike portion to turn the January put into a pure vertical spread.

Rationale: This structure is bearish in the New Year but neutral for the next month. Implied volatility in January options is quite low but they still could use some financing as the stock is going sideways at the moment.  Addionally, December Macau data should be out in early January, and continued weakness into the new year could be just the catalyst to finally have the stock breakdown.