Playing a Potential Pullback in Wynn Resorts (NASDAQ:WYNN)

Wynn Resorts WYNN shares have been on a winning streak this year, rising 75% from their 2009 close and surging more than 12% in the last month alone.  But with the shares newly trading above the 100 level, is it time for a pullback?  There have been recent signs of caution in the casino industry that could trickle down to impact WYNN.

Earlier this week, WYNN's peer MGM Resorts International MGM issued a third-quarter revenue guidance that was worse than expected.  What's more, MGM's founder (billionaire Kirk Kerkorian) is in the process of selling off some of his stake (roughly 28 million shares) in the open market.  The casino operator also got hit with a downgrade from Soleil Securities to hold from buy.

WYNN itself was hit with a downgrade on Tuesday as BMO Financial Group reduced its rating in the stock to market perform from outperform, which is essentially a shift in sentiment to a hold from a buy. What's more, Buckingham Research released a note stating the gaming company's likely revenue and earnings results may fall short of the Street's current bullish estimates.

On the plus side, WYNN recently tagged a new 52-week high and has been in a long-term technical uptrend since March 2009. For those on the bullish and bearish side of the fence, we've outlined a pair of option strategies below for educational purposes only.  All prices are as of midday Wednesday, when WYNN shares were trading at $102.80, up 44 cents on the day.

Moderately Bearish Option Strategy: Put Tree

Investors could play a potential pullback with a “put tree” strategy, which is a modified version of a ratio put spread. For example, an investor could trade the November 100/90/80 put tree by buying the 100-strike put and selling both the 90 and 80 puts.  The combined debit for this multi-legged spread is $2.40.

At expiration, the maximum potential gain (occurring if WYNN is trading between the short put strikes at expiration), is $7.60, or the difference between the long put and the higher-strike short put ($10), minus the debit paid. To the upside, losses begin to accrue north of $97.60 and are capped at the $2.40 debit paid.

Below the lower breakeven price of $72.40 (the lowest strike price less the maximum gain), losses are unlimited to zero because of the naked short 80-strike put.  This obligates the trader to purchase WYNN shares at $80 if the stock is below the $80 strike.  The short 90 put and the long 100 put, on the other hand, cover one another. This chart was created with the profit/loss calculator tool, part of my virtual trading account.

Bullish Option Strategy:  Bull Call Spread

Disagree with BMO and think WYNN will continue to move higher? Consider a short-term bull call spread. The November-dated 95/105 call spread can be purchased for a net debit of $5.70 (buying the in-the-money 95 call and simultaneously selling the out-of-the-money 105 call).  If WYNN falls to $95 (or lower) by expiration, the most the spread trader can lose is the debit paid.

Anywhere above the 105 strike at expiration, both calls will be exercised and the call spread will be worth $10. The investor has already spent $5.70 on the spread, so his resulting profit is the maximum $4.30. Breakeven on November 19 when the options expire is $100.70, or the long call strike plus the debit. Even if WYNN moves slightly lower over the next five weeks, the spread will still be profitable, as illustrated below.

The above information is provided by OptionsHouse, LLC (“OptionsHouse”) for informational and educational purposes only and is not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Commentary and opinions expressed are those of the author/speaker and not necessarily of OptionsHouse. Neither OptionsHouse nor any of its employees, officers, shareholders or affiliated companies guarantee the accuracy of or endorse the views or opinions of guest speakers or commentators. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.
Photo Credit: Nan Palmero

Related posts:

1. First Solar FSLR outperforms following upgrade
2. How Far Can Apple Inc. AAPL Go?
3. Trading Strategies for Intel INTC Post-Downgrade