By Jared A Levy
Casino giant Wynn Resorts (NASDAQ:WYNN) reports earnings on Thursday, July 29, 2010. Analysts are expecting quarterly earnings of 32 cents per share and the high and low estimates are $0.58 and $0.09, respectively. Earnings season has been relatively strong thus far, with about 80% of companies beating analysts’ expectations.
Granted, earnings estimates are subjective, but the market seems to like what it’s seeing so far across the board. The S&P 500 Index (SPX) is up more than 100 points (or about 10%) since its lows early in the month. The questions heading into Thursday’s report are not only what will WYNN’s report look like but what will the market make of these earnings?
Fundamental Data
Looking at the Las Vegas tourism data (through June 1, 2010), visitor volume has slowly been climbing. Compared to 2009, volume is up 1.5% (according to the Las Vegas Convention & Visitors Authority). Overall gaming revenue for the Las Vegas Strip is up 4.4% for the year, but much of that was due to a large jump in February, which will NOT be included in this quarter’s numbers. Gaming revenue has actually been on the decline for April and May on the Las Vegas Strip.
Wynn did open its Encore City Center late last year, adding a large amount of inventory of rooms to fill. Additionally, WYNN derived a large amount of its revenue from its Macau operations, as the region saw a large jump in gambling revenue compared to last year, peaking in May. This increase, however, was stunted in June and early July, possibly due to the World Cup drawing international tourists elsewhere.
Past Earnings
WYNN has the ability to be volatile and somewhat unpredictable around its earnings reports. The stock has moved as much as 30% after the report, and actually in October of 2008 moved more than 45% in four days surrounding the report (two days before and two days after). The last report was somewhat muted, with the stock rallying 5% ahead of the number, then dropping back down 5%.
Technicals & Options
The stock is currently trading at $87.40, right between the 85 and 90 strikes. The implied volatility (IV) mean of the August at-the-money (ATM) strikes is about 49% (which implies a 3% daily standard deviation). The 85 straddle is trading for $9.65, or 11% of strike. Historical volatility is not totally disconnected from where IV is currently priced, with 30-day observed vol at about 47%. Based upon these observations, one can assume that the options markets are not expecting an extremely volatile move after the report (within 5%, according to options prices).
The stock is above its 20-, 50- and 200-day moving averages and Tuesday touched its upper Bollinger band, which proved to be the high of the day. There is strong technical support around the $73.00 level and a bit more above that around $83, which was the stock’s high on June 29.
One way to hedge a long stock position
If you are long stock going into the report and are concerned that the stock may pull back, a collar may be employed. The collar involves maintaining your long stock position and combining that with the purchase of a put and the simultaneous sale of a call to help finance the cost of the put.
While the collar will hedge your downside, the covered call will limit your upside. If we examine WYNN and assume you own the stock at its current price or lower ($87.40), you can currently sell the August 90 call for $3.25 and buy the August 80 put for $2.10. This would bring in a credit of $1.15, which would reduce your cost basis in the stock position. By doing this trade, you could completely change your risk/reward dynamics.
Essentially, if you have a neutral or slightly bearish bias going into the earnings report, this may be a strategy to examine. If you bought the stock for $87.40, your new cost basis would be $86.25 ($87.40-$1.15). The long 80 put would limit your risk to the downside to $6.25, but on the upside you would also be limited to a profit of $3.75 because of the shorted 90 call.
If the stock dropped, you could close the position for a potential profit if you thought the stock would rally back up. If the stock rallies and exceeds 90 (short call strike) you could also remove the position, possibly for a loss. (Although you would retain the stock and most likely be profiting more from your long stock than what you would lose in your options).
There are certainly things to consider and of course you have other choices as well. You could always just hold your stock, sell your stock or even substitute your stock entirely for a less risky options position. It really depends on your sentiment on WYNN. Always be mindful of your own risk/reward profile before placing any new trades.