Well, this is a mistake we make only occasionally but it hurts pretty bad when we do. That is, getting the story right in a stock yet picking the wrong structure to play it. It has been our sense that most stocks we want to short would hold up through the end of the year and then see a rough 1st qtr of 2015. Wynn looked like one of those stocks, then the bottom dropped out and we had on a calendar that needed the stock to stay within range for December.
In hindsight we probably should have bailed in this trade almost immediately as it was only a few hours after we printed it that a negative headline hit. The stock recovered quickly and the structure was unchanged. We should have seen that as a sign and gotten out for even. Instead, it’s a loser.
So since December expires today we need to close the entire trade rather than be assigned stock vs the Jan puts (same position but different capital requirements and no real reason to stock around):
ACTION – Sold to Close the WYNN ($150) Dec/Jan 180 put calendar at even
– Bought to close 1 Dec 180 put for 30.00
– Sold to close 1 Jan 180 put at 30.00
the options are wide and should be traded for even with eachother
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:
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:
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:
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.