Options Update: Wynn Resorts Limited Draws Bullish Credit Spread Attention

The gaming sector has been under fire for quite some time, and Las Vegas-based Wynn Resorts Limited
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is no exception. The company has shed more than half its value during the past 52 weeks and underperformed the S&P 500 Index (SPX) by nearly 17% during the past 60 trading days. The group is receiving a bit of a boost today, as hopes rise among investors that Chinese visa restrictions for Macau could be loosened.

“I think there might be some hope percolating about some relief on the visas in Macau,” Susquehanna Financial Group told the Dow Jones Newswires this morning. The brokerage firm also stated that preliminary numbers for December gaming revenue in Macau revealed a smaller-than-expected decline of 7%.

The news sparked some heavy put activity for WYNN this morning, placing the security on our Intraday Volume Explosion List. So far today, more than 7,800 puts have changed hands on the security, outpacing the stock’s average daily put volume by more than 9 to 1. But, while this attention to put options remains consistent with current sentiment in the options pits, a closer look reveals that the trader’s intentions could be more optimistic in nature.

The Anatomy of a Wynn Resorts Bull Put Credit Spread

Digging into the activity, I discovered that 2 large blocks of 2,700 contracts traded on both the January 45 put (UWY MI) and the January 50 put (UWY MJ) at about 10:52 a.m. Eastern time. The UWY MI contracts changed hands at the askprice of $1.00, while the UWY MJ contracts traded at the bid price of $2.50. With the blocks trading at the same time on the same exchange, I can reasonably assume that these trades are related. In fact, it would appear that we are looking at a neutral-to-bullish credit spread on WYNN.

Wynn Resorts volume details

A bullish credit spread involves selling a higher-strike put and purchasing a lower-strike put. This results in a net credit to the investor’s account. The maximum profit is achieved as long as the sold put stays out of the money by expiration. In today’s example, the trader needs WYNN to stay above the 50 level by the close of trading on Jan. 16, when these options expire.

So, how does today’s example work on paper? First, the trader purchases the UWY MI puts for a debit of $270,000 — ($1.00 * 100)*2,700 = $270,000. Next, the trader sells the UWY MJ puts for a credit of $675,000 — ($2.50 * 100)*2,700 = $675,000. A total credit of $405,000 for the position is arrived at by adding the credit received from selling the January 50 and the debit incurred for purchasing the January 45 puts — $675,000 – $270,000 = $405,000.

Hedging Your Bets

So, why not just sell the January 50 puts outright and collect the entire $675,000 premium? Well, the purchased January 45 puts act as a form of insurance against an unexpected plunge in the position. Once WYNN breaches the 50 level, the sold 50 put becomes a liability, and continues to lose money until the shares breach the purchased 45 put.

By entering this trade, the investor is indicating that he expects WYNN to hold above the 50 level for the next several weeks. The shares have rallied more than 6% today and are holding their ground about the 50 level so far, but let’s see if the stock’s technical or sentiment backdrops provide any additional drivers for this trade.

Getting Technical

From a technical perspective, WYNN seems an unlikely candidate for any form of bullish position. As mentioned above, the stock has fallen more than 50% in the past 52 weeks, and has steadily underperformed the SPX for the past several weeks. However, the shares have rebounded nicely from their mid-November lows, after setting a double bottom in the round-number 30 area. Furthermore, WYNN has maintained the support of its 10-day and 20-day moving averages for the better part of this rebound. Finally, the security has broken out above former round-number resistance at the 50 level in today’s trading. This region could now provide a solid support level for the shares going forward.

Daily chart of Wynn Resorts since September 2008 with 10-day and 20-day moving averages

The Sentiment Drivers

On the sentiment front, pessimism heavily blankets WYNN shares. The stock’s Schaeffer’s put/call open interest ratio (SOIR) of 1.75 indicates that puts nearly double calls among near-term options. What’s more, this ratio ranks above 84% of all those taken during the past year. Additionally, more than 32% of the stock’s total float is sold short, providing the potential for a short-covering rally. Meanwhile, Wall Street analysts are betting heavily against WYNN. According to Zacks.com, 8 of the 12 analysts following the security rate it a “hold.” This configuration provides ample room for potential upgrades, which could prove beneficial to a bull put credit spread.

Sentiment indicators for Wynn Resorts

The Verdict?

Given the current state of the global economy, I’m not completely convinced that a bullishly oriented position on a gaming stock is the best investment choice. That said, WYNN’s technical and sentiment backdrops, combined with the short-term nature of this trade, could produce the desired effect. Remember, a put credit spread trader doesn’t need the shares to rally, and as long as WYNN is able to hold its ground above technical support at the 50 level through Jan. 16, the investor keeps the entire premium on the position.

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Copyright Schaeffer’s Investment Research. www.schaeffersresearch.com.