The stock market has been in whipsaw mode since the correction started in February. First we had traders reacting to a hotter-than-expected wage inflation report. But then the headline mode switched completely to rhetoric from the White House about trade wars with China and Europe.
Since then, groups of stocks have suffered consequences of one tariffs headline or another. Wynn Resorts (NASDAQ:WYNN) stock had its own set of headlines, namely the debacle from Mr. Wynn himself. But that unfortunate situation turned out to be an opportunity to go along the stock.
So I come into today’s trades with profits in hand. The Wall Street’s reaction to the news was overdone. Recently the stock suffered another loss but this one was fundamentally based. The data from Macau was softer than expected.
Nevertheless I still believe that this too is an opportunity to reload another set of bullish trades for WYNN through 2018.
But since we are still in headline mode and the situation in China is still on shaky grounds, I will not risk $163 per share to buy WYNN stock outright with no room for error. Instead I will use options where I can build a buffer between current price and my level of risk.
In essence I am more comfortable betting on the proven downside support holding this year than the potential of upside hopium materializing. So today’s trade does not need a rally for me to win. But if one ensues, my profits will materialize faster. In fact the stock can fall another 15% from current levels and I can still retain my maximum bounty.
Fundamentally, WYNN is not cheap from a price-to-earnings perspective. But this is a company on the move, so growth is what’s important. So far execution had been flawless under Mr Wynn so the current management still remains untested. But I believe that like Steve Jobs did with Apple (Nasdaq:AAPL), Wynn left a good system in place which won’t require much skill to keep on track.
Technically, WYNN now sits 25% lower than the double top $200 level. This is also a pivot level for the past five years so it should lend support for the coming months. The risk of another leg lower is real but there are at least two consolidation zones below that will also provide defense for my setup.
WYNN Stock Trade Idea
The Bet: Sell the WYNN Sep $135 put. This is a bullish trade for which I collect $2 to open. I have a 85% certitude that I will retain maximum gains. But if price falls below my strike then I own shares. I would then need to manage off my breakeven point of $133.
Selling naked puts carries big risk especially for a stock as frothy as WYNN. For those who want to mitigate it, they can sell a spread instead.
The Alternate Bet: Sell the WYNN Sep $135/$130 bull put spread where I have the same odds of winning. Then the spread would yield 12% on risk.
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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.
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