On an otherwise bullish day for equities, DraftKings (NASDAQ:DKNG) stock tumbled nearly 9% on its second-highest volume day ever. Over 18 million shares changed hands as the popular sports entertainment and gaming company sank below its 20-day moving average for the first time since its April IPO.
What exactly happened? The cause for the selling frenzy was news that a California bill seeking to legalize sports betting in the state was killed “because of opposition from tribal-casino operators.”
What could have been a boon for the company has now been pushed further into the distance. Traders’ disappointment was certainly on full display throughout the day, but the uptrend for DraftKings stock isn’t dead just yet.
Jefferies to the Rescue?
The news wasn’t all bad on Monday. Jefferies analyst David Katz issued a glowing report highlighting the firm’s bullish view on DKNG. The investment bank initiated coverage for the freshly minted public company and gave it a “buy” rating.
Among other things, Katz said DraftKings was “best positioned to capitalize” on the growth of sports wagering across the nation. His price target is $55 and implies 44% of upside potential from Monday’s closing price.
Let’s take a closer look at how yesterday’s whack impacted DraftKing’s price chart.
DraftKings Stock Chart
With only two months of price history under its belt, there’s no need to consult a larger time frame. The daily chart doesn’t even qualify as the big picture yet. It’s essentially the only picture we have to analyze. We’ve had enough time to develop multiple pivots and a bona fide trend. The trajectory has been higher, interrupted by only two mild retracements. And the magnitude is impressive. From its IPO low of $17.60, DKNG stock rose as high as $44.79 — a gain of 154%. Then, significant sellers were finally found.
The dip was quickly bought at the rising 20-day moving average last Monday, and everything has been extremely bullish since. That is, until yesterday. The 9% smack gave back almost all of last week’s gains.
But here’s the silver lining. Though it resulted in a potential double top near the peak, we haven’t yet broken below a support zone. As long as last week’s low of $35.45 holds, there’s a chance this turns into some simple consolidation to digest recent gains. It could also set the stage for a better breakout trade over $44.79.
That’s the first trade idea worth taking if we make a push for it. The second setup I could see playing is a deeper retracement toward the low-$30 level. If we can see a multi-day retracement form that brings in oversold conditions, I think bottom-fishing with naked puts could be interesting.
Play the High Volatility With Naked Puts
Given the elevated uncertainty surrounding companies in their infancy, stocks like DKNG have sky-high options premiums. Tack on the relatively cheap stock price, and you have a powerful combination for strategies like naked puts and covered calls. Suppose you have a bullish bias on the stock and are a willing buyer at lower levels. At the same time, you want to build a high-probability trade that stacks the odds in your favor. Naked puts are the answer.
The Trade: Sell the July $30 puts for $1.00.
We will probably need the stock to fall a bit further to get filled. But if it does, you’re essentially getting paid $100 for your willingness to buy 100 shares at $29. That’s almost a $10 discount to Monday’s closing price. And if DraftKings shares don’t fall to $30 by expiration, then you’ll score the $100 of cash.
Compared to the initial margin requirement of around $300, the $100 translates into an attractive 33% return on investment.
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