After making new multi-year lows on Oct. 1, shares of two of the biggest casino stocks, Wynn Resorts (WYNN) and Las Vegas Sands (LVS) have been on a hot streak.
WYNN, after trading down to $50.06 on Oct. 1, moved up $20.24, or 39.71% in the next six trading sessions before finally showing some weakness yesterday. LVS also had a similar run, with a 28.60% rally in the same time frame.
Much of the recent rally in casino stocks is attributable to a long-awaited increase in Macau gaming revenues during Golden Week. Casino stocks are especially exposed to China for their revenue, according to JPMorgan, with WYNN having the most exposure of any U.S. stock. So any sign of renewed slowdown in China would be certainly be detrimental to casino stocks.
From a technical perspective, both of these casino stocks are starting to display some weakness after their strong moves higher. The 9-day RSI is turning over, and both LVS and WYNN are approaching overhead resistance. LVS in particular is at a technical inflection point, having filled in the gap dating all the way back to January 2013.
Given the recent exuberance in the shares, a pullback or a period of consolidation may be in the cards.
With implied volatility still elevated even after the recent rally, and with earnings due Oct. 21 for LVS and Oct. 27 for WYNN, you can position in a neutral to bearish manner via options selling strategies.
In this instance, I would look to sell an out-of-the money call spread in November on these two casino stocks.
- Sell LVS Nov $50/$52.50 call spread for 50-cent credit
- Sell WYNN Nov $80/$85 call spread for 90-cent credit
Both of these spreads are positioned about one standard deviation higher than the price, with LVS 6.43% out of the money and WYNN 12.36% out of the money. The comparatively larger cushion in WYNN versus LVS reflects the much higher level of implied volatility in WYNN (69.31% implied volatility) in relation to LVS (44.91% implied volatility).
The LVS call spread has a max profit of the 50-cent credit received, while the risk is $2.00 (25% return on risk). The WYNN call spread has a potential gain of 90-cents against a possible loss of $4.10 (21.95% return on risk).
In managing the trade, I would look to close out a portion of the position in either of these casino stocks if either spread goes in the money. If not, then they are left alone to expire worthless and keep the initial premium.
As of this writing, Tim Biggam did not have a position in any of the aforementioned securities.
