Did someone make a big blunder trading thousands of options contracts for Wynn Resorts (WYNN)? It’s hard to imagine that being the case considering that we’re talking about the “smart” money. Still, we’re all humans and mistakes do happen. Here’s the lowdown.
On paper, Wynn Resorts seems a great buying opportunity. As sports fans may know, the Formula One circus – the premier international motor sports event – will be arriving in Las Vegas later this week. Per The Atlantic, an F1 race averaged 1.21 million viewers during the 2022 season, a 28% increase from the year-ago viewership average.
In turn, unusual options volume data spiked for WYNN stock. On Nov. 10, total volume reached 178,688 contracts against an open interest reading of 326,435 contracts. Further, the delta between the Friday session volume and the trailing one-month average metric came out to 748.23%.
Even better for those bullish on WYNN stock, the transactional data appeared to smile on the optimists. Call volume clocked in at a mercurial 119,594 contracts against put volume of only 59,094 contracts. This pairing yielded a put/call volume ratio of 0.49. So far, so good, right?
Well, not so fast. As The New York Times reported, a labor strike threatened to disrupt the race weekend. And while hotel and resort operators – including Wynn – struck deals with union leaders, the race could still be an embarrassment for Sin City.
Ticket prices – initially offered at roughly $2,000 a year ago – have plunged precipitously. That suggests imploding demand, possibly hurting growth projections for WYNN stock. But that’s not the most unusual development.
An Irrational Trade Materializes for WYNN Stock?
In covering options dynamics for various resources, a recent trade for WYNN stock may be the most unusual I’ve ever seen. Because of the sheer irrationality of the transaction, it could be a data-aggregation slipup, human error or some other bizarre incident. I’ll have to let you decide.
As stated earlier, last Friday saw a significant bump up in WYNN stock call options. However, it’s important not to rush into a face-value assessment. In particular, if a select few institutional investors are writing (selling) those calls, they are effectively short the underlying security. On the other hand, a wave of retail traders going long the calls may be running into a trap.
While it’s important not to use only one resource to craft your decisions, the reality is that the smart money – the institutional players – enjoy access to resources and information that regular traders do not. So, when they are willing to underwrite the risk of selling calls – and thus buying back the security at the listed strike if the option becomes exercisable – it’s crucial to pay attention.
Therefore, I’ve been for months hammering the use of Fintel’s options flow screener, which exclusively targets big block trades. Doing this exercise, investors can see what appears to be the initiation of a call debit spread strategy.
Under a typical call debit spread, a trader engages two same-expiry call options: selling a higher-strike-price call and buying a lower strike-price call. Subsequently, the maximum profit potential of this trade is the difference between the strike prices of the sold call and long call minus the net premium paid to initiate the trade. On the other end, the maximum loss comes out to the net premium paid.
But in the case of WYNN, a trader seems to have bought and sold the same call option at the same strike price! I’m referring to the Nov 24 ’23 90.00 Call. Therefore, no matter what happens, whether WYNN stock goes up, down or in flippin’ circles, the same-strike, same-expiry bought and sold calls would cancel each other out.
And because the premium to buy the calls is larger than the premium received to sell the calls, the trader is guaranteed to lose.
Of course, no trader would rationally enter such a transaction. So, it’s a mistake, something is wrong with the data or some other bizarre event may have occurred. I just don’t know.
Turning to the Fundamentals
Mistake or not, it may be better to be skeptical about WYNN stock rather than to rush into shares. For one thing, the F1 race in Vegas may indeed be a dud. And that may cause race organizers to reconsider investing in Sin City. Plus, local residents have expressed anger at the disruption race preparations have caused.
Additionally, evidence seems to indicate that revenge travel sentiments are beginning to wane. That would make sense given the terrible combination of high inflation, high borrowing costs and mass layoffs. With fewer discretionary funds available, one of the easiest ways for consumers to mitigate broader economic pain is to stay at home as much as possible.
If anything, I would see how this F1 race turns out before placing big bets on WYNN stock.
On the date of publication, Josh Enomoto 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.
