Wynn Resorts Ltd. (WYNN) has garnered quite a bit of attention
from put traders today, despite the fact that the shares have
soared to a fresh multi-year high. WYNN may be riding the coattails
of fellow gaming concerns MGM Resorts (MGM) and Boyd Gaming (
), which drew
bullish research notes from Bank of America/Merrill
earlier today. That said, put volume has nearly tripled WYNN's
daily average, with more than 5,100 contracts changing hands so
far. However, there was at least one trader with neither bullish
nor bearish designs, offering up an example of a strategy designed
to take advantage of declining volatility: a calendar spread.
For the uninitiated, calendar spreads are generally neutral in
terms of movement in the underlying stock - though you can skew the
spread bullishly or bearishly by altering the strike prices.
Ultimately, this strategy is designed to take advantage of
declining implied volatility, with the trader typically betting on
little-to-no movement from the underlying stock. As such, traders
employing this options strategy tend to avoid entering calendar
spreads ahead of events such as earnings reports.
Getting down to the trade itself, a block of 168 February 120
puts traded at about 10:17 a.m. Eastern time on the International
Securities Exchange (ISE) for the bid price of $3.29. At the same
time and on the same exchange, 168 March 120 puts changed hands for
the ask price of $5.64. Given this data, it would appear that we
are looking at a potential
on Wynn Resorts. This strategy is also known as a time spread, or a
The Anatomy of a Wynn Resorts Calendar Spread
Now, this setup may not make a lot of sense to beginning options
traders, but the investor above is looking for accelerated erosion
in the implied volatility of the front-month option, which he hopes
to buy back at expiration for practically nothing, while collecting
a larger premium by selling to close the back-month option.
Drilling down on today's WYNN calendar spread, the trader sold
168 February 120 puts for $55,272 -- ($3.29 * 100) * 168 = $55,272.
At the same time, the trader purchased 168 March 120 puts for
$94,752 -- ($5.64 * 100) * 168 = $94,752. The total outlay for this
position would be $39,480 -- $94,752 - $55,272 = $39,480.
The maximum loss on this trade is limited to the initial net
debit of $2.35, or $235 per pair of contracts. Meanwhile, the
maximum profit is limited to the premium received for the
back-month option when it is sold to close out the position, minus
the cost to buy back the front-month put, minus the net debit paid
to establish the position. The maximum profit is achieved if WYNN
closes at $120 per share on February expiration.
Since there are two expiration dates for this trade, and we
cannot know for certain what the exact value of the March 120 put
will be when the February 120 put expires, we can only estimate the
approximate return on the WYNN calendar spread. In the best-case
scenario, WYNN would close at the 120 strike when February options
expire, allowing the February 120 put to expire worthless. At that
point, the March 120 put would be worth only its time value and
implied volatility -- no intrinsic value.
In this example, the March 120 put will be worth an estimated
$4.97 at February expiration, according to
pricing calculator, allowing the trader to sell to close the
position for $497 per contract. After subtracting out the cost of
the position ($2.35), the trader would snag a profit of $2.62, or
$262 per contract. Below is a chart for a rough visual
The most ideal calendar spread trade occurs when near-month
implied volatilities are high relative to options with a longer
life. Optimally, the spread trader needs implied volatility to
remain steady on the shorter-term sold option (or to increase on
the purchased option). The best-case scenario for a calendar spread
is that the sold option expires out of the money, while the
purchased option retains time premium. At the time of the trade,
implieds for the WYNN February 120 put arrived at 40.23%, while the
implied volatility for the March 120 put rested at 47.21%. For
comparison, as of the close of trading on Monday, WYNN's one-month
historical volatility rested at 26.36%, while the stock's two-month
historical volatility was 27.35%.
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