Wynn Resorts Ltd (WYNN)

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Bears Bet Heavily Against Wynn Resorts (WYNN) But Could It Be A Trap?
By: Barchart | October 13, 2022

From almost every angle, the case involving Wynn Resorts (WYNN) appears overwhelmingly bearish. With fears steadily rising about a global economic slowdown along with geopolitical rumblings, circumstances don’t favor WYNN stock. Not surprisingly, pessimistic traders smelled blood in the water, heavily betting against the casino and resorts play recently. However, these bearish traders could be overlooking one critical catalyst.

First, let’s get the bad news out of the way. Throughout this year, WYNN stock has not looked like the promising investment it once was several years ago. Since the January opener, shares gave up more than 33% of equity value. In comparison, the benchmark S&P 500 index – no outperformer by any stretch of the imagination – lost over 25% of value during the same period.

Fundamentally, consumer sentiment imposes significant challenges on WYNN stock. On the U.S. side of the equation, millions of households struggled against the onerous weight of skyrocketing inflation. Naturally, the expansion of the money supply eroded the purchasing power of every issued dollar, negatively impacting discretionary purchases.

For Wynn’s Macau business, weak data from China’s manufacturing sector implied greater challenges for the nation’s economy. As well, these headwinds could easily spill over regionally thanks to China’s status as the world’s number two economy.

On top of it all, the entire planet may face a significant recession. Certainly, the surge in hydrocarbon energy prices – both from the OPEC+ cuts and Russia’s shuttering of energy outflows to Europe – don’t help matters. And while the Federal Reserve and other central banks seek to implement hawkish policies to drive down inflation, this action can also lead to the very recession that seemingly everyone’s talking about.

Under these global circumstances, WYNN stock seems like such a small and unimportant market idea. Therefore, it’s perhaps not surprising that bearish traders targeted the underlying business.

WYNN Stock Suffers from Bearish Pressures

Following the ringing of the closing bell on Oct. 12, WYNN stock became one of the talking points regarding unusual options activity. To be fair, it didn’t generate anywhere close to the most unusual pricing dynamics. Nevertheless, given the massive headwinds, it’s not hard to figure out that many traders succumbed to the temptation.

Specifically, traders moved in on the $27.50 puts with an expiration date of Jan. 19, 2024. From the time the orders were placed, market participants have 463 days until their options expire worthless. Volume reached 2,000 contracts against an open interest reading of 177.

What’s distinct about the above trade is its underlying aggression. Conspicuously, WYNN stock closed at $58.71 in the open market. Therefore, shares must decline 53.16% for the puts to be at the money. Based on the time to expiry, anything is possible. Still, that’s a bold bet because if anything, the bulls can make the argument that most of the ugliness has already been priced in.

Further, the bid-ask spread as represented by the midpoint price ($2.58) came out to 7.36%. Granted, it’s not the narrowest spread but given the timeframe, it might be reasonable. Wider spreads generally indicate lower levels of liquidity. As well, market makers give themselves some safety margin for difficult-to-place transactions.

Not too much of a shocker, data from Barchart.com indicates that the put/call open interest ratio for WYNN stock presently stands at 0.94. Typically, the delineation point between bullish and bearish sentiment is 0.70, with figures higher than this threshold signifying bearish sentiment (i.e. traders are buying more puts than calls).

A Matter of Culture

Although arguably most financial and fundamental metrics indicate that WYNN stock is a sell – hence, the bearish activity in the options market – pessimistic traders could be overlooking the cultural element associated with the underlying company. More directly, Wynn’s consumer behaviors between its Las Vegas and Macau units are radically different. And this difference could be key in whether or not the aforementioned puts end up in the money.

The devil is in the details, specifically Wynn’s second quarter of 2022 earnings report. For the Las Vegas operations, Wynn reported $561 million in revenue. Of this tally, $135.3 million or 24% came from the casino subsegment. In other words, gambling activities represent a secondary concern for Wynn’s Vegas patrons.

On the other hand, in the Macau unit’s operations, the company generated revenue of $58.6 million. From this tally, a staggering $40 million (or 68%) stemmed from the casino subsegment. In other words, the Macau patrons go to Wynn to mostly gamble. Everything else is a sideshow.

That’s significant because games of chance offer multiple revenue streams per unit of time. For instance, if patrons attend a fancy dinner at Wynn, they can only eat one meal per session. However, gamblers can gamble several times per session (say per one hour) depending on the nature of the game and the size of the associated participant’s wallet.

At scale, for any casino outfit, it’s far better to have more of the revenue stream stemming from gambling units. That way, casino operators enjoy a revenue add-on effect that’s either extremely difficult or impossible to replicate in other business units.

Rolling the Dice

The above is not to say that WYNN stock is guaranteed to move higher. It can very well fall into the abyss. But because casino operators are generally weighing their Asia market businesses more heavily, the distinct nature of eastern gamblers to western gamblers may play a significant role. Therefore, the WYNN bears are likely taking an unusually high risk.

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