Why the Fall in Wynn Resorts, Limited Stock Is a Prime Opportunity
Let me start by saying how the accusations that Mr. Wynn is facing are as serious as they get. The trade here is by no means suggesting that we should discount the severity of them. This is merely a bet on the price action as a result of a steep dip in Wynn Resorts, Limited (NASDAQ:WYNN) stock that should find support. Mr. Wynn needs to face his legal responsibilities. Meanwhile, WYNN stock investors will have to face the consequences on Wall Street.
We all know the story by now. Last week, WYNN stock fell over 10% on headlines of sexual allegations against Mr. Wynn himself. Usually there would be a dip in the stock when the CEO is accused of malice, but there are a few cases where the connection is stronger than normal. Steve Jobs to Apple Inc. (NASDAQ:AAPL), Jeff Besos to Amazon.com, Inc. (NASDAQ:AMZN) and Elon Musk to Tesla Inc (NASDAQ:TSLA). Wynn is one of those examples.
How to Trade WYNN Stock
Still, the sharpness of the selloff may be overdone and therein lies my opportunity to enter this successful casino trade. Luckily for WYNN stock investors, this dip comes from a high level.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
The irony is that the buy trigger may have come from Mr. Wynn himself when he bought his own stock in the open market to show confidence in its prosperous future and he was right. Investors followed in him in droves. Even now, WYNN resorts stock is up 65% in one year, which is double of the performance of the PowerShares QQQ Trust, Series 1 (ETF) (NASDAQ:QQQ).
This morning, the selling continues and that’s to be expected. The headlines are still abuzz and WYNN stock will be vulnerable until all the speculation turns into more facts than hear-say. Meanwhile, I will use this uncertainty to sell some downside risk to try and catch this falling knife, but leaving plenty of room for error.
Yes, I want to be long WYNN, but I am not brave enough to risk $175-per-share here without knowing the whole story. Still, I am willing to own the shares if it falls an additional 20% in the next few months. This is a bullish market and in this economic environment, I think that casinos will prosper regardless of who is leading their boardrooms.
Fundamentally, WYNN is cheap in relative terms and reasonably priced to its competitors. So if I were to own the shares at a discount I am confident that I will manage them to profitability. I admit that there is a fear element not knowing the outcome of this legal battle that could bring down the leader of the company, but I think the company will survive the leader.
Technically, I see several zones where support could be strong enough to stabilize this free fall. The first is just below current levels and around the $167/$170 area. Next, I see another pivotal zone just above $155-per-share. Strongest even is at $145, where WYNN stock had two months worth of consolidation that provided the base for that last 35% rally that took the stock to $200 highs.
Being the conservative investor that I am, I will go out in time far enough to leave an even a bigger buffer, so I don’t have to sweat the daily whipsaws as more headlines breakout on this fresh story. The staler it gets, the less effect it will have on the stock price. Investors will then shift attention to company fundamentals more so than headlines as terrible as they are on the personal level.
The bottom line is that investors are shocked and therein lies profit potential. The downside risk premiums are as hot as they get so I can profit from them in the long-term.
The Trade: Sell the WYNN Jun $130 put. This is a bullish trade for which I collect $3.50 to open. I have an 85% certitude that I will keep my maximum gains. But if the price falls below my strike, then I own shares and suffer losses below $126.50.
Selling naked puts carries big risk, especially for a stock as volatile as WYNN is these days. For those who want to mitigate it, they can sell a spread instead.
The Alternate Trade: Sell the WYNN Jun $130/$125 credit put spread. The spread has the same odds, but would deliver 15% yield on risk.
It is important to note that today’s trade set ups do not need a rally to profit. I simply need support for WYNN stock to hold for the mid term and let time do the work. Ultimately, investing in stocks is fraught with danger, so I never risk more than I am willing to lose.
Get Nicolas Chahine’s newsletter for free here. He 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.
More From InvestorPlace
The post Why the Fall in Wynn Resorts, Limited Stock Is a Prime Opportunity appeared first on InvestorPlace.
