When is a stock considered too extended to the upside? Sometimes there are certain rules that traders have for themselves, and some traders just look at the chart and candlesticks and make a judgment call.
Here is a trade idea that counts on a move lower on a stock that some traders might consider to be extended — and yet it can still profit if the stock moves higher.
Many analysts expected gaming stocks to struggle in December, but Wynn Resorts (WYNN) saw revenue move higher in November year-over-year, and Wynn’s market share increased to 8.3%. This jubilance has been reflected in the price of the stock in recent weeks, which has soared from around $163 to nearly $182 — and this in a relatively bearish market.
The trade: Sell the January 195/200 call credit spread (selling the January 195 call and buying the January 200 call) for 0.65 or better.
The maximum potential profit for this trade is $0.65 if WYNN stock is trading below $195 at January expiration. Both call options would expire worthless. The maximum loss is $4.45 ($5 – $0.65) if WYNN is trading above $200 at January expiration. Breakeven is $195.45 at expiration based on a credit of $0.65.
Even though the options for this trade idea expire in about a month, it bears to take a look at what the company is doing now. The company is in the process of building a $4 billion palace in Macau. In addition, Wynn has applied for a gaming license in Massachusetts, which would require additional capital for any new plans.
The company is counting on the economy to keep growing both in Macau and here in the United States — because it counts on discretionary spending from consumers. The company may be spreading itself out too much and may regret some of this spending in the future. Currently the company has just over $2 billion in cash vs. more than $6 billion in long-term debt.
As mentioned above, WYNN stock has been on quite the move higher lately. It is currently trading at all-time highs. Can WYNN continue to climb? That remains to be seen, but WYNN stock triggered a reversal on Thursday when it traded below the Wednesday’s low.
So what’s the risk for this trade? WYNN stock would have to move higher by another $13 before expiration and stave off any potential profit-taking, which would move the stock lower. Such a move would correlate to almost a 20% increase in the stock’s value since the beginning of December — not impossible, but I know where I’d place my bet in Vegas!
At the time of publication, Kmiecik had no positions in the securities mentioned.
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