The Unlucky Investor's Guide to Options Trading guides readers through the world of options and teaches the crucial risk management techniques for sustainable investing.
DraftKings Outlook: Doom or Boom?
Dec 15, 2021
Down over 3.5% today, DraftKings (DKNG) shares are making fresh lows for 2021. After going public last year via a SPAC, DKNG rallied from $20 to $74 by March of this year. It appears the exuberance for the stock has now fully burned out as investors grow weary of the firm’s continued losses.
A quick glance at DKNG’s Q3 results tells a tale of why investors may be getting fatigued holding the stock. While Q3 revenue was an impressive 62% greater than the same quarter last year, this is approximately 40% lower than the prior 3 quarters where revenues seemed consistent. Additionally, the company spent more in Q3 2021 on marketing expenses than any previous quarter, approximately 50% more than Q3 2020.
While time will tell if there is a lagged impact of the boosted marketing efforts, the results for last quarter left investors with the worst quarterly loss per share to date. We shall see if further expansion and legalization of online sports gambling will turn the stock around.
The continued selling of DKNG shares led to a climb higher in implied volatility as the options continue to see elevated premiums. With an implied volatility rank (IVR) above 70 and no earnings before February, option sellers may find opportunity in the January cycle.
The low price of DKNG means that buying power requirements to place undefined risk trades are also lower, this coupled with larger premiums means potential trades with higher theoretical return on capital (ROC). Take for example this short strangle from Quiet Foundation’s Alpha Boost email this morning. The trade combines a short 22.5 put option and short 35 call option for DKNG in the January monthly options cycle.
If managed for a 50% profit of $70, this trade would yield a 26% ROC. This is assuming limited movement in the stock and no increase in the buying power requirement throughout the life of the trade. The trade will make money if the stock stays between the breakeven prices (21.09 and 36.41)
Those willing to take a more directional stance on DKNG maybe interested in just selling the put option and eliminating any upside risk.
Removing the call option naturally lowers the total premium collected. That said, potential ROC is still 15% if managed at 50% profit.
Traders looking for other high implied volatility opportunities in gambling stocks may turn to Las Vegas Sands (LVS). LVS saw a strong recovery from the March 2020 lows before selling off again from March of this year.
Unlike MGM Resorts (MGM) or Caesars Entertainment (CZR), LVS now has most of its properties in Asia. The slower reopening of Asian countries, coupled with China’s Covid policies hurt LVS more than its U.S. centric competitors.
Traders looking to get long LVS might look to a defined risk put spread such as this one generated by the Alpha Boost system.
This trade combines a short 35 put and long 33 put to create a trade risking $129 to make $71. The trade makes money if LVS is above $34.29 by expiration.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
Dec 13, 2021
More straightforward pricing and greater accessibility make Small 2YR Yield futures a better route for acting on your opinion of these projections. A current price of 6.80* simply reflects an expectation of 0.68% for Treasury rates with two years of duration. Though there are some nuances between Fed Funds and Treasury rates, the two are highly correlated.
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