Financial

Penn National Stock Among Best Covered Call Ideas, Says Bank of America

Slumping Penn National Gaming (NASDAQ:PENN) stock is among 10 names Bank of America recommends as top near-term covered call ideas.

Penn National Gaming’s Hollywood Casino in Pennsylvania. Bank of America recommends selling calls on the stock. (Image: Baltimore Sun)

Covered calls are an options strategy also known as call writing, or call selling, in which an investor sells call options on a stock he or she owns. Typically, covered calls are used as an income-generating play on an equities market participants believe will trade sideways, to the downside, or slightly higher into its expiration date.

While covered call strategies will underperform stocks in fast bull markets, they will still realize significant profits,” writes a team of Bank of America analysts led by Gonzalo Asis. “Covered call strategies tend to outperform outright stock ownership in flat, down and slightly up markets.”

The bank examined 5,000 potential covered call ideas on members of the widely followed Russell 1000 Index pertaining to the upcoming August 20 expiration. Writing calls on Penn National stock at the $70 strike was one of the top 10 ideas generated by the Bank, and the only one involving a casino equity.

Good Idea for Near-Term Upside with Penn National Stock

While the largest regional casino operator still has fans on Wall Street, the shares are locked in a now-lengthy slump.

Penn National slid 9.7 percent last week as reopening plays, including gaming equities, were sold-off due to concerns about the coronavirus Delta variant potentially sapping demand. With that decline, the once hot regional casino operator has been more than cut in half from its 52-week high of $142 set in March, and is off 23.34 percent year-to-date — good for one of the worst showings among casino stocks.

Still, Penn has its supporters, with Goldman Sachs recently placing the name, along with Las Vegas Sands (NYSE:LVS), on a list of 10 stocks with the most upside potential relative to their 12-month price targets.

Last Friday, Penn National closed just over $66, a level the stock hadn’t seen since last December, and it hasn’t traded above its 200-day moving average in over two months. The recent bearishness in the name could be conducive to call writing, because it limits the risk investors will have their shares called away, while still being able to generate some upside from a stock that’s offered little of it of late.

Bank of America Strategy for Penn

Bank of America recommends selling the Penn $70 calls expiring Aug. 20, which traded around $4.05 per contract last week. The bank says, at that price, investors would earn a call and dividend premium of 5.9 percent, and a call-away return of 8.5 percent if Penn stock close above $70 on Aug. 20. Just four of the other names on the bank’s list are forecast to deliver higher call and dividend premiums.

Something investors considering the Bank of America idea should keep in mind is that Penn National reports second-quarter results before the open of US markets on Aug. 5. If the company surprises to the upside and delivers an upbeat outlook, the stock could potentially rally.

Last month, Penn raised second-quarter revenue and adjusted earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) forecasts.

Todd Shriber

Gaming Financials, Casino Business----Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund, where he specialized in trading sector and international ETFs leading up to and during the financial crisis. Currently, he analyzes, researches, and writes on ETFs for a variety of Web-based publications and financial services firms. Shriber has been quoted in Barron's, CNBC.com, and The Wall Street Journal. His work has been published on sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business, and Nasdaq.com. He joined the Casino.org news writing team in 2019, and lives in Southern California, where he enjoys golf and taking his black lab to the dog park. When in Las Vegas, he likes to wager on college football, the NBA, three-card poker, and roulette, even though he knows better. Email: todd.shriber@casino.org

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Todd Shriber