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