Once again Wynn Resorts, Limited (NASDAQ:WYNN) stock fell out of favor for no good fundamental reason. It has been a wild ride for investors, as this stock has had its high and low points of late. Back in January, earnings catapulted it to $200 per share and now it’s back to the starting point at $175.
In between there have been a slew of changes. The company was hit hard by headlines about the founder Steve Wynn, and those actually put WYNN in legal jeopardy. Needless to say, investors in the stock suffered severely as it fell 20% in mere hours and just days after the January spike.
WYNN stock had clawed its way back to $200 per share since then, but this week it fell 10% in two days on a price target downgrade and soft data from Macau. The downgrade doesn’t worry me since their target is still at $215 per share, which is 21% above current price. The Macau data is a little more concerning, but not 10% lower stock price worth. And therein lies the opportunity.
Today I share a trade that profits from what others fear. The fundamentals in WYNN are still solid so at this point, the fears are overblown.
But I am not reckless. Wynn Resorts stock is not cheap. It has an astronomic price-to-earnings ratio so it could have a lot more room to fall from that perspective. Also, Mr Wynn leaving the helm leaves the long term future of the company in the hands of new management. But for the mid-term, I believe the machine that he left behind should be on cruise control through 2018.
So I will not risk $178 per share buying the shares outright and without any protection. Instead I use WYNN options where I can build a moat around my risk just in case the selling persists.
Click to EnlargeTechnically, WYNN stock has a pivot zone above $171 and $160 per share. Those tend to be support on the way down. Neither bulls nor bears want to lost those battles and that creates congestion. There are several other points of contention and all of which should lend decent support in the face of this selloff.
This is a rinse and repeat trade for me. When the stock fell in January I sold for easy profits, but the trigger then was much clearer than this week’s dip. However, I still believe that the value in the company in current macroeconomic conditions is fair enough that I want to repeat the trade setup for another run of hopefully more easy profits.
WYNN Stock Trade Ideas
The Trade: Sell the WYNN Dec $130 naked put. This is a bullish trade where I collect $2.85 to open. Here I have a 85% theoretical chance of success. But if the price falls below my strike then I accrue losses below $127.15.
Selling naked puts carries big risk, especially for a stock as expensive and as volatile as this. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the WYNN Dec $125/$130 credit put spread. The spread has the same odds but would deliver 13% yield on risk. Neither trade require a rally to profit.
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Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on twitter and stocktwits.