Casino bulls up the ante in key name
04/27/17

Casino stocks flew higher yesterday, and options traders upped the ante in a leading name.

Wynn Resorts (NASDAQ: WYNN) pushed to its highest level in two years after earnings and revenue blew past analyst forecasts. Activity spiked in the short-term calls as investors looked for gains to potentially continue into Friday’s close. Yep, they kept betting with the house…

The 28-April 125 calls led the charge. Buyers initially paid $0.60 when WYNN shares were around $122. The stock proceeded to climb above $127, and those contracts shot up to $2.50. In other words, a 4 percent gain in the underlying security more than quadrupled the value of the options.

Here’s a look under the hood: Calls fix the price where investors can purchase a stock, and the time frame. Relatively small moves can be amplified on a percentage basis, but the contracts can also turn to goose eggs really quick if they’re wrong on direction. For instance, those 125s will lose all their value if WYNN fails to close over $125 tomorrow night. Breakevens range from $125.60 (for those who bought early) up to $127.50. 

Other traders paid $0.32 to $1.05 for the 28-April 127 calls, which require an even bigger move in the stock. WYNN ended Wednesday’s session up 5.90 percent to $125.19.

Wynn Resorts (WYNN) 6-month chart

Source: OptionsHouse by E*TRADE

Three words explained the rally: China, China, and China. After all, most of the company’s profit comes from the gaming hub of Macau, which saw a sharp resurgence in tax revenue only two months ago.1 WYNN’s business in the city came up aces, with operating income rising 49 percent. That helped drive adjusted per-share earnings to $1.24, well above the $0.97 analysts had expected.2 It was an especially rude surprise for bears who were betting against the stock… and there were plenty based on hefty short interest around 16 percent of the float heading into the report.3

It was the latest of several positive headlines associated with China in recent weeks. First-quarter economic growth, along with industrial production and trade data from last month also beat estimates.4

Las Vegas Sands (NYSE: LVS) has an even bigger footprint in Macau. Options traders, perhaps reading the tea leaves in the region, snapped up two different sets of calls last week. Both of them more than doubled in value. LVS, by the way, announced its own Street-beating results last night.

In summary, China had doubters but now its rising economic tide seems to be lifting many boats.

 

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1. Seeking Alpha: Macau gambling revenue soars in February. 3/1/17.

2. Business Wire: Wynn Resorts, Limited Reports First Quarter 2017 Results. 4/25/17. RTT News: Wynn Resorts Ltd. Profit Advances 16% in Q1. 4/25/17.

3. Yahoo Finance: Key Statistics for Wynn Resorts. 4/26/17.

4. Reuters: Steel, stimulus drive China's strongest economic growth since 2015. 4/17/17. Reuters: China March factor output rises 7.6 percent year-on-year, fastest since December 2014. 4/1/7. Business Insider: Chinese trade data beats across the board as crude imports surge. 4/13/17.