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A large, unusual tranche of call options traded today in Wynn Resorts (WYNN) after it released its Q2 earnings yesterday. The out-of-the-money calls highlight some investors' belief WYNN stock could be undervalued.
The stock is at $75.90 in midday trading, down slightly today, although WYNN stock has been sliding for the past 3 months. On May 24, WYNN stock was at $94.62. So, it's now down about 20% in the past quarter.
Wynn Resorts reported that revenues and earnings were significantly higher than a year ago (YoY). Revenues of $1.73 billion for the second quarter rose 8.6% from last year ($1.6 billion) and its adjusted net income rose 20.5% YoY to $124.5 million from $103.3 million.
Moreover, due to share buybacks, its adjusted earnings per share (EPS) rose slightly more (+23%) to $1.12 per share. Buybacks lower the denominator in the EPS calculation, raising the overall per-share net income number.
That could be what is exciting investors to buy large tranches of its call options.
Unusual Call Options Activity
The Barchart Unusual Stock Options Activity Report today shows that over 36,000 call options at the $82.50 strike price have been traded. This is for an expiration period of 100 days away on November 15.
That activity is over 252 times the number of call options previously outstanding at this strike price. It signifies that some investors (i.e., the call options buyers) are willing to pay $3.33 in the midprice for a strike price that is already 8.7% over today's spot price.
In other words, the breakeven price for the call option buyers is $82.50 +$3.33 (assuming they paid the midprice), or $85.83 per share. That breakeven price is over $10 higher or 13% more than the spot price. They must believe that WYNN stock looks undervalued here.
Moreover, this is also a bullish trade for existing investors who sold these calls. They receive a yield of 4.39% (i.e., $3.33/$75.90), over the next 3 months. Plus, if the stock rises to this strike price, they can get a realized gain of 12.6% (i.e., $82.50/$75.90).
Why Investors May Be Bullish on WYNN Stock
For one, the stock pays a nice dividend of $1.00 per share or 25 cents per quarter. Given the adjusted EPS of $1.12 this past quarter, earnings cover the dividend well. That makes it very secure and provides investors with a dividend yield of 1.3%.
Second, the stock's valuation is not expensive. For example, analysts now project that EPS will reach $5.53 in 2024 and $5.79 next year, according to Seeking Alpha. That means that WYNN stock trades on a favorable forward price/earnings (P/E) ratio of just 13.1x (i.e., $75.90/$5.79).
Assuming that the global economy does not slide into a recession (one reason why WYNN stock could be lower over the last 3 months), WYNN stock looks cheap at that P/E metric.
The bottom line is that investors are happy to buy large tranches of long-term calls in WYNN stock today. They are betting that the stock will make a good investment over the next quarter.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
