Sunday, December 8, 2013

WYNN: A Macau play

Update 3/27/2014: WYNN has been gathering dust on my Roll Shelf since the options from my first position expired in January, awaiting on opportunity to be rolled forward into a new position. On March 27 it closed below the 10-day price channel and traded still lower the next day.

Through an analytical error (i.e., I didn't check the chart), I missed out on a rise from late January up to $249.31 that would have produced a tidy profit.

I've removed WYNN from the Roll Shelf. The stock price rose by 21.2% over the 40-day life of my position, or +193.1% annualized. The otpions used to construct the position produced a 15.5% yield on risk, or 141.8% annualized.

Update 12/9/2013: I've opened a bull position in WYNN, structuring it as a bull put spread sold for credit and expiring Jan. 17. The position has 2:1 leverage with a maximum yield on risk at expiration of 15.4%. The position has a 7.2% hedge of profitability below the entry price. Options modeling gives the short leg of the spread a 74% chance of closing out of the money for maximum profit.

Wynn Resorts Ltd. (WYNN) is an analog to the company I analyzed on Thursday, Las Vegas Sands Corp. (LVS). Both are heavily invested in China, particularly in the gambling destination Macau. See my analysis, "LVS: Gambling on China".

WYNN sent a bull signal in Thursday's trading, and LVS on Wednesday, each  by breaking above its 20-day price channel. WYNN's breakout has not yet been confirmed.

The charts are similar, showing each in a final wave up from

However, they show that WYNN is less advanced in its rise. I count WYNN as being in the first uptrending wave since the beginning of their current major trends, from Nov. 20 in the case of WYNN, and from June 24 in the case of LVS.

Click on chart to enlarge.
WYNN 2-years 2-day bars (left), 20 days 30-minute bars (right)
Macau accounts for 87% of Wynn Resorts' market cap. Like Las Vegas Sands, Wynn Resorts is a Vegas-based China  play, with all the risks and dangers attendant upon such.

China is a huge, dynamic, growing market filled with people who, by reputation, love to gamble. It's a market ultimately ruled by a heavy bureaucratic hand whose rivalries in the region could lead to U.S. involvement as a geopolitical counterweight and whose currency remains under tight government control and thus subject to sudden decision that can upset the apple cart.

Analysts are far less enthusiastic about Wynn's prospects, collectively coming down with an enthusiasm rating of negative 38%. That compares to positive 69% for Las Vegas Sands.

Wynn Resorts reports return on equity of 333% with huge debt amounting to 25 times equity.

Each of the three quarterly earnings reports for 2013 have come in higher than its year-ago counter part. Wynn has surprised to the upside seven times in the last three years and to the downside five times. It has been profitable in each quarter.

The earnings yield is 3.57%, lower than 75% of casino and gaming companies. Shares are priced at 28 times earnings.

Shares are selling at a premium to sales. It takes $3.25 in shares to control a dollar in sales.

Institutions own 77% of shares.

WYNN on average trades 1 million shares a day and supports an extremely wide selection of options strike prices, with spacing running form 50 cents to $2 near the money.

Implied volatility is running at 27% and has fallen from its one-month peak of 28% on Dec. 5. Volatility stands in the 85th quintile of the one-month range, meaning that volatility is high.

Options are pricing in confidence that 68.2% of trades will fall between $159.47 and $186.85 over the next month, for a potential gain or loss of 7.9%, and between $166.59 and $179.73 over the next week.

Contract trading on Friday was skewed toward calls, which were running at more than double their five-day average volume. Puts were running at 16% above average.

Wynn Resorts next publishes earnings on Jan. 27. the stock goes ex-dividend in February for a quarterly payout yielding 2.27%, which brings the total earnings and dividend yield to 5.84%.

Decision for my account: I intend to open a bull position Monday on WYNN, structuring it as a bull put spread, expiring in January and sold for credit. Good chart, OK financials, with the high ROE compensating for the high debt/equity ratio.

I'll place the trade in the last half hour before the closing bell on Monday if WYNN maintains its upward momentum. If it falters, then I'll place it on my Watchlist for later consideration.


My shorter-term trading rules can be read here. And the classic Turtle Trading rules on which my rules are based can be read here.

I use the number 68.2% in using applied volatility to calculate the expected trading range. This comes from statistics and refers to the one standard deviation boundaries, which are expected to contain 68.2% of whatever is being studied. Putting it another way, given an item (a trade or whatever), there is a 68.2% chance that it will appear within those boundaries.

Elliott wave analysis tracks patterns in price movements. The principal practitioner of Elliott wave analysis is Robert Prechter at Elliott Wave International. His book, Elliott Wave Principle, is a must-read for people interested in this form of analysis, as is his most recent publication, Visual Guide to Elliott Wave Trading

Several web sites summarize Elliott wave theory, among them, Investopedia, StockCharts and Wikipedia.

See my post "Chart Analysis: Nomenclature" for an explanation of my method for labeling waves on the chart.

By preference I place my trades in the last half hour before the closing bell in New York. See my essay "When is the best time to trade" for a discussion of the practice.

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.

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