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Earnings Confirm the Bearish News in This Stock

Earnings Confirm the Bearish News in This Stock

As earnings season winds down, there are still some trading opportunities to capture. One example, as Barron’s recently reported, is in Wynn Resorts (Nasdaq: WYNN). The stock sold off after the company announced earnings that beat expectations despite a revenue shortfall.

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  • WYNN daily chart

    Barron’s noted, “the stock had a dismal 2018, along with fellow gaming companies MGM Resorts International (MGM) and Las Vegas Sands (LVS), as worries about China’s economy and currency led to a slump in lower gross gaming revenue, or GGR, in Macau.

    Add that to with allegations of sexual harassment against co-founder and CEO Steve Wynn—who denied the charges and cashed out of the company in March—and it’s not surprising that Wynn is still working off last year’s woes, with the shares down 33.6%.

    Yet year to date, the stock has soared 31.3%, ahead of the market and peers. Its most recent earnings report was strong, analysts are excited about the opening of Encore Boston Harbor in June, and others applauded its discipline in walking away from merger talks with Australia’s Crown Resorts .

    Trade tensions have of course taken a toll, but if the tariff situation can finally be resolved, some speculate that could be a boon for Macau, and operators like Wynn that are invested there.”

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  • In the most recent quarter, the company reported earnings of $1.61 a share on revenue of $1.65 billion, while analysts were looking for EPS of $1.58 on revenue of $1.66 billion.

    Deeper in the report, traders found cause for concern, “the company’s operating revenue from Wynn Macau slipped 15.3% year over year in the quarter, while adjusted property earnings before interest, taxes, depreciation, and amortization fell 21.9%.

    Operating revenue at its Las Vegas property were down 7.1%, and adjusted property Ebitda decreased 24%.

    Analysts were split on the results, even the bulls. Nomura Instinet’s Harry Curtis lowered his Ebitda forecasts this year and next and cut his price target to $142 from $146 following the results, writing that he was disappointed in a decline in VIP volumes, and even with good execution in non-VIP areas, mass gaming share still fell sequentially, along with GGR.

    Yet Stifel’s Steven Wieczynski is still more upbeat about his call on the stock, raising his price target to $157 from $146. “Wynn is somewhat of a story in a temporary transition,” Wieczynski wrote, although he admits that the shares will likely “fluctuate” near term with trade talks and the quarterly results.

    Telsey Advisory Group’s Brian McGill is on the sidelines with a Market Perform rating and lowered his price target by $5, to $120. He writes that while he applauds the company’s honesty about a choppy VIP Macau outlook, the mass-market segment should be able to drive double-digit growth. Yet with “that as a backdrop, we have a difficult time seeing a reason to get overly excited with the stock at these levels.”

    The weekly chart shows the pullback could be significant, and bearish.

    WYNN weekly chart

    A Trading Strategy To Benefit From Weakness

    A price decline often results in higher than average options premiums. That means option buyers will be forced to pay higher than average prices for trades, But, sellers could benefit from the higher premiums.

    In this case, with a bearish outlook for the short term, a call option should be sold. The call should decline in value if the stock declines and sellers of calls benefit from this decline.

    Selling options can involve a great deal of risk. A spread options strategy can be used to limit the potential risk of the trade.

    One strategy that traders can consider is the bear call spread. This is a trade that uses two calls with the same expiration date but different exercise prices.

    Traders buy one call and sell another call. The exercise price of the call you sell will be below the exercise price of the long call. The call is sold to limit the risk of the trade. So, this strategy will always generate a credit when it is opened and will always have limited risk.

    The risk profile of this trading strategy is summarized in the diagram below which shows the limited risk and reward.

    bear call spread

    Source: The Options Industry Council

    While risks and rewards are limited, this strategy will allow traders to generate potential gains in a stock they might otherwise find too risky to trade. Many individuals ignore bearish strategies because of the risks.

    You’ll know the maximum potential gain with this strategy as soon as it’s opened. It is equal to the amount of premium received when the trade is opened. The maximum loss is equal to the difference between the exercise price of the options contracts less the premium received and is also known.

    Every day, we scan the markets looking for trades that carry low risk and high potential rewards. These trades are available almost every day and we share them with you as we find them. Now, it’s important to remember these are trading opportunities in volatile stocks.

    When we find a potential opportunity, we evaluate it with real market data. But because the trades are volatile, the opportunities may differ by the time you read this. To help you evaluate the current opportunity, we show our math and explain the strategy.

    A Bear Call Spread in WYNN

    For WYNN, we could sell a June 21 $120 call for about $7.43 and buy a June 21 $125 call for about $5.00. This trade generates a credit of $2.43., which is the difference in the amount of premium for the call that is sold and the call.

    Remember that each contract covers 100 shares, opening this position results in immediate income of $243. The credit received when the trade is opened, $243 in this case, is also the maximum potential profit on the trade.

    The maximum risk on the trade is about $257. The risk can be found by subtracting the difference in the strike prices ($500 or $5.00 times 100 since each contract covers 100 shares) and then subtracting the premium received ($243).

    This trade offers a potential return of about 94% of the amount risked for a holding period that is relatively brief. This is a significant return on the amount of money at risk. This trade delivers the maximum gain if WYNN is below $120 when the options expire, a likely event given the stock’s trend.

    Call spreads can be used to generate high returns on small amounts of capital several times a year, offering larger percentage gains for small investors willing to accept the risks of this strategy. Those risks, in dollar terms, are relatively small, about $257 for this trade in WYNN.

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