The house edge has hit hard times in casino stocks Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN). But in today’s market, a pairs trade using a couple well-designed spreads banking on some green in LVS stock and a bit of continued red in WYNN stock may be worth placing a bet on. Let me explain.
LVS stock and WYNN stock have been under pressure. They’re not alone, but heightened trade tensions the past couple months, overseas properties in China gaming enclave Macau and even a harmful typhoon hitting the island recently have taken a toll. And each casino stock’s market-bucking downtrends probably has Las Vegas Sands and Wynn investors feeling very isolated.
The good news is most trends in investing do come to an end. And when the dust finally settles on today’s bearish narrative, LVS and WYNN are still going to have their doors open. At this point in time, though, jumping in early, as well as pressing one’s luck by continuing to bet on lower prices in Las Vegas Sands and Wynn, seems risky.
It’s why a pairs trade wagering on a widening spread between the two casino stocks has caught this strategist’s attention.
Bet on This Casino Stock: LVS Stock
I’ve already laid out some of the problems or headwinds facing LVS stock. The casino’s earnings miss in late July and weak revenues in its Singapore business are a couple other albatrosses that have weighed on Las Vegas Sands bulls. Shares are down 25% since June highs, but since they’re not exactly out yet, I’m willing to bet on some green turning up for Las Vegas Sands.
Technically, this casino stock has corrected by 27% at its recent low a couple weeks ago. In and of itself and other than the weakness occurring as the U.S. market has made new highs, it’s not only a common price move — it’s also generally a healthy event.
In this instance I’m also positive on the fact that LVS stock established a new all-time high this summer preceding its current corrective downtrend. And now with shares consolidating in a triple weekly doji pattern at the 38% support level and stochastics looking opportunistically oversold, it’s time to bet on some green in this casino stock.
Las Vegas Sands Options Strategy
Reviewing the options market for LVS stock, I’m favoring the Nov $62/$65 call spread. With shares at $60.75 the vertical is priced for 90 cents or less than 1.5% of the risk associated with buying LVS stock.
Bottom line, investors will need to see some green out of this casino stock — and a bullish resolution of LVS’ doji formation. But given what’s been discussed I like those odds. And with earnings built into the life of the position and this vertical stationed close to the action — a payoff of $2.10 or opportunity for a profitable adjustment, looks accessible.
Bet Against WYNN Stock
Back in late July, I wrote about WYNN stock as a short play within a pairs trade featuring U.S. companies with large exposure to China. Wynn sits in fourth position, with revenues in excess of 60% tied to the world’s second-largest economy.
The bet on red has paid off handsomely for bearish shorts in WYNN stock, though the price action was a bit too much of a good thing for our moderately bearish spread by expiration. Nevertheless, as part of today’s pair trade with LVS stock I’m inclined once more to bet on red in WYNN stock.
Wynn is the weaker of the two casino stocks technically. Unlike LVS stock, shares of Wynn never took out their all-time-highs and more recently, failed to hold the 38% Fibonacci level during its corrective downtrend. Don’t get me wrong. I’m agreeable to a stock like WYNN turning itself around eventually. But there are those occasions where continuing to bet on the hot hand, well more or less, can make sense too.
WYNN Stock Options Play
For a bearish strategy on WYNN stock, I’m once again favoring an unorthodox approach to positioning. With shares near $134, buying an asymmetrical Nov. $115/$110/$100 put butterfly combination for even money or better has caught our eye.
If shares of Wynn move higher, this “bear” doesn’t need to worry about being squeezed since the play didn’t cost anything to enter. But if Wynn stock drops towards $110 and a couple percent above the 62% retracement level, a profit as large as $5 is possible at expiration.
There is no free lunch though. First, this spread definitely gives up some downside profits versus shorting. Still, in a volatile mover like WYNN, being able to control and cap risk is huge. In this instance, the trader’s exposure is limited to $5. But if bears still think they’ve found free food, think again.
Losses for this spread begin to build below $105. That’s right, below $105! Bottom line, if WYNN stock moves too far in the red, this trader’s profits — which max out at $110 — eventually disappear.
Bottom line, this strategy would be a highly unusual way for a through-and-through bear to position in WYNN. But for like-minded traders and where $105 and below looks more attractive on the price chart as a value proposition, using this spread’s diverse exposure to turn from bearish to bullish looks okay.
Investment accounts under Christopher Tyler’s management do not currently own positions in any securities mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT and StockTwits.