Name That Trade – For The $WYNN

by Dan April 28, 2015 12:02 pm • Commentary

Event: Wynn Resorts (WYNN) reports Q1 results after the close. The options market is implying about a 4.25% event move which is essentially in line with the stock’s 4 qtr average.  

Price Action / Technicals:  the stock has been a train-wreck since its all time highs made in March 2014, down almost 50%, and down 13% so far in 2015, the best trade on the board has been to sell every counter trend rally:

[caption id="attachment_53145" align="aligncenter" width="600"]WYNN since Feb 2014 from Bloomberg WYNN since Feb 2014 from Bloomberg[/caption]

It has paid to be patient and sell or short at the downtrend, but a look at the 5 year chart shows what would be an apparent date with destiny, round-tripping the entire move from the 2012 lows back to $100. For those of you who are not familiar with stock market bubbles and their subsequent burst, this is what it looks like, and just as the stock overshot on the upside, it is very likely to do so on the downside:

[caption id="attachment_53146" align="aligncenter" width="600"]WYNN 5yr chart from Bloomberg WYNN 5yr chart from Bloomberg[/caption]

Volatility Snapshot:  Given the stock’s relentless decline, options prices has stayed surprisingly high, with 30 day at the money implied vol (blue line) at about 33%, but this is a function of realized vol (white line, how much the stock has been moving) also remaining high at 36.8%.  So in some ways one could view options prices fair at the least, and possibly cheap given the movement of the underlying without an event like earnings:

[caption id="attachment_53147" align="aligncenter" width="600"]WYNN 30 day at the money IV (blue) vs realized (white) from Bloomberg WYNN 30 day at the money IV (blue) vs realized (white) from Bloomberg[/caption]

Fundamentals: to put it bluntly, they are a shit-show.  With 70% of their sales from Macau, the goings on in China have had a massive impact on WYNN’s results with consensus calling for a 30% year over year earnings decline and a 15% sales decline. There have been no shortage of reasons, slowing Chinese economy, increased regulation, corruption crackdown causing a massive decline in high-rollers, smoking bans resulting in mass market declines to name a few.  Even with the expected earnings decline, the stock trades at 25x this year’s estimates.

My View:  For the time being it does not feel like Macau is coming back anytime soon. I am sure there is an intermediate term bull story, I just don’t see it given what appears to be a massive focus by the PBOC to stimulate growth and ease the potential for some sort of credit event. From my generally uninformed macro perch, it seems to me that China could be (as they have been for years) on the precipice of a full blown financial crisis.  That’s neither here nor there for the time being, but it seems there are few indications in the near term that gaming revenues are set to turn.  So as I think about the quarter, all of these issues are known, and while options prices look cheap, the stock is not likely to implode on one event, it is likely to happen over time, which makes selling near dated options an attractive way to own downside puts for a steady decline.

Hypothetical bearish trade – WYNN ($130.30) Buy May 1st weekly/May regular 125 put calendar for 2.00

– Sell 1 May 1st 125 put at 1.05

– Buy 1 May 125 put for 3.05

Breakevens on May 1st – This trade does best on a modest down move on earnings, followed by a continuation of selling over the next few weeks. The risk is a move higher or drastically lower where the 2.00 is at risk.

Rationale – The pattern in WYNN on recent earnings has been a small move (up and down) followed by a much larger move lower in the weeks after. This trade plays for a continuation of that trend with defined risk of 2.00. We don’t necessarily want to be there for the event itslef and may look to sell into a rally if it were to happen. But based on recent history, this is a good structure for those that do.