The Las Vegas Strip has been eerily silent and empty during the coronavirus pandemic, but all that is about to change. Casinos are reopening this week as part of Las Vegas’ “Phase 2” plan to reopen Nevada’s most important economic engine.
As part of this return to normalcy, Wynn Resorts (NASDAQ:WYNN) will be reopening its Wynn and Encore casinos tomorrow, June 4.
With all of the uncertainty still swirling through the U.S. economy and the various reactions we have seen to the coronavirus threat, we’re taking a second look at our previously recommended short position on WYNN.
We are expecting more volatility in the weeks and months to come as we wait for answers to many questions. How many people will go to Vegas? How much disposable income are they going to spend? How expensive is it going to be for casinos to reopen? What are operating margins going to look like?
But just because we’re waiting for data doesn’t mean we can’t also generate some extra income along the way.
Explaining a Covered Put
A covered put is like a covered call’s bearish cousin.
With a covered call, you own the stock and you sell a call with a strike price above the price of the stock. If the stock rises above your strike price by expiration, the call expires in the money, and the shares get called away from you, which means you no longer own the stock.
On the other hand, if the stock remains below your strike price by expiration, the call expires out of the money, and you get to keep 100% of the premium you received for selling the call while retaining ownership of the shares of stock.
With a covered put, you are short the stock and you sell a put with a strike price below the price of the stock. If the stock falls below your strike price by expiration, the put expires in the money, and the shares get put to you — which means you are no longer short the stock.
On the other hand, if the stock remains above your strike price by expiration, the put expires out of the money, and you get to keep 100% of the premium you received for selling the put while remaining short the shares of the stock.
While this is the first time we’ve recommended a covered put in Trade of the Day, this is a common trading strategy among short stock sellers. It’s just one more way informed traders can generate income in their portfolios.
WYNN Rises on Reopening Hopes
Looking at the WYNN chart, you can see that investors believe this reopening is great news for the stock. Bullish traders have pushed the stock above its late April high of $90.81 today in the hope that the reopening will draw large crowds and start adding to WYNN’s bottom line.
Daily Chart of Wynn Resorts (WYNN) — Chart Source: TradingView
As we said above, we’re expecting more volatility to affect this stock, which could send WYNN lower. Vegas may be reopening, but that still carries a lot of risk. If you, like us, want to continue holding a short position in WYNN, a covered put would be an excellent way to generate extra income in the meantime.
InvestorPlace advisers John Jagerson and S. Wade Hansen, both Chartered Market Technician (CMT) designees, are co-founders of LearningMarkets.com, as well as the co-editors of Strategic Trader.
