It’s Friday, which means another look at unusually active options catching my attention that could be worth your closer examination.
This week’s seen the major indexes move lower as investors worry about higher interest rates and, more importantly, how long they will stay this high. It was the first week out of the past three in negative territory, so investors can’t complain too much.
There were a number of unusually active call options from Thursday trading that allow you to latch onto two stocks worth owning for the long haul.
The best part? You can buy your way in for only $150 down.
Have a great weekend!
Penn Entertainment
Penn Entertainment (PENN) had the second-highest unusually active call option on Thursday with a Vol/OI ratio of 55.62x. The Dec. 15 $25 strike had an ask price of $1.30, or just 5.9% of its $21.99 closing price.
I’ll get back to the option, but first, I want to talk a little about why the gaming company’s stock makes sense for the long haul.
There’s been a lot of talk about Dave Portnoy taking Penn to the cleaners ever since the company announced that it had signed a 10-year deal in August with ESPN to rebrand its online sports book as ESPN Bet.
Under the terms of the deal, Penn is paying ESPN $1.5 billion in cash over 10 years. In addition, Penn granted the sports network 500 million warrants to buy 31.8 million shares over the next 10 years. For those without a calculator close at hand, that’s $15.72 a share. In addition, ESPN could receive 6.4 million bonus warrants to buy Penn shares if the joint venture achieves specific performance benchmarks.
As the company pointed out in its Aug. 8 press release, the deal could add as much as $1 billion in adjusted EBITDA annually to its Interactive business.
The big issue for many was that it sold Barstool Sports back to Portnoy for $0 in cash, a non-compete, and the right to 50% of any proceeds from Portnoy selling the business at any time.
The reality is that once Penn acquired Score Media and Gaming in October 2021 for $2 billion, Barstool Sports’ days were numbered. Like a general manager trying to trade an unrestricted free agent the day before the trade deadline, you won’t get a lot in return. Penn got what it could get. Move on.
Say what you will about ESPN’s shrinking audience; it’s still one of the most valuable brands in sports television. Penn was wise to trade up.
As for the call, it expires in 14 weeks. Given the delta was 0.37630, PENN stock has to increase by $3.45 for you to double your money on the $130 investment. Of course, if it goes up by that amount, based on its $21.99 closing price, it is almost at your net cost of $26.30 a share.
For $130, you’ve bought your sell the right to buy $2,500 worth of Penn stock. That’s a winning hand.
American Eagle Outfitters
American Eagle Outfitters (AEO) was easily within Barchart's top 100 unusually active call options on Thursday with a Vol/OI ratio of 9.58x. The Nov. 17 $20 strike had an ask price of $0.17, or just 1.0% of its $16.77 closing price.
I’ll be the first to admit that the retailer has had its ups and downs over the years. It traded below $7 as recently as April 2020 and as high as $38.99 in June 2021. Volatility is its friend.
Analysts don’t like it. Of the 11 that cover its stock, only three rate it Overweight or an outright Buy, and two consider it a Sell or Underweight, with an $18 median target price, about 10% above where it’s currently trading.
So, why buy?
It reported Q2 2024 results on Wednesday. Revenue was $1.2 billion, flat over last year but in line with analyst expectations. Meanwhile, it earned $0.25 a share in the quarter, 67% higher than the consensus. Earnings beat due to a 680 basis point gross margin increase and a strong Aerie brand performance.
Through the end of June, American Eagle’s trailing 12-month free cash flow was $435 million. Based on an enterprise value of $3.05 billion, its free cash flow yield is 14.3%. I consider anything above 8% to be value territory.
As long as it continues to open stores at a moderate pace -- it opened four net new stores in the second quarter -- it should continue to generate above-average free cash flow.
Worst case scenario, you sell the call before November and double your money on the option without exercising your right to buy its shares.
The odds of revisiting $38 over the next 12-18 months are much higher than if it falls below $10. The risk/reward proposition is tilted in your favor at a time when there aren’t a lot of deals available.
On the date of publication, Will Ashworth 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.
