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Sell Puts in DraftKings Stock to Have a High Chance of Profit

Bulls are returning to DraftKings stock. Take note.

DraftKings (NASDAQ:DKNG) bulls reasserted their dominance over the past two weeks, and their efforts deserve applause. The collective buying reversed the downtrend in DraftKings stock and powered prices back above key technical levels. Let’s chronicle the turnaround and discuss how to profit from continued strength.

DraftKings (DKNG) logo on a phone
Source: Lori Butcher / Shutterstock.com

The broader market’s ongoing resilience is one reason why we must look for reasons to buy stocks, not sell them. Wednesday’s price action is illustrative of the undying bid. The S&P 500 slipped lower on increased uncertainty surrounding the relationship between the U.S. and China. But did the market stay down? No! By day’s end, buyers had jammed the S&P 500 up nearly 0.5% on the day. Losing sessions are becoming a rarity. So too, are quality short trades.

This is one of the reasons why I favor using weakness in stocks like DraftKings as an opportunity to purchase. The market has proven time and again that momentum stocks can’t be kept down for long. Eventually, money rotates back in, and they get buoyed up with everything else.

DraftKings Stock Chart

DraftKings (DKNG) chart showing recent upside breakout
Source: The thinkorswim® platform from TD Ameritrade

DKNG stock did give reasons for concern last month after multiple bearish price signals emerged. Its failure to make a new high resulted in a double top formation in mid-June. Instead of transitioning into sideways consolidation, the so-called “M” pattern was completed with a support break that saw two weeks of downside follow-through. The descent was dramatic enough to turn the 20-day moving average lower. It also submerged prices below the 50-day moving average when it finally appeared in early-July.

No matter how optimistic you are on the potential upside of sports betting and online gambling, it’s hard to ignore when sellers take control. Instead of blindly buying when prices are sinking, wait for signs of strength, then pounce. In simplest terms, this occurs when prices break resistance levels. It could be a prior pivot high or significant moving averages.

The rally on July 16 provided a hat trick of bullish signals. We breached an old ceiling at $35 as well as the 20-day and 50-day moving averages. The volume also added a reason for hope. The groundswell in participation grew to over 18 million shares, marking the most active session of the month. The positive momentum has continued ever since.

Bullish Fibs

Uptrends follow a path of two steps forward, one step back. Or, three steps forward, one step back. In Fibonacci retracement speak, we say that healthy pullbacks retrace one-third to two-thirds of the prior advance before working their way higher. This translates roughly to a 38.2% to 61.8% retracement. When prices pull back more than 61.8%, it places the uptrend into question.

DraftKings (DKNG) chart showing 61.8% retracement
Source: The thinkorswim® platform from TD Ameritrade

If you look at the correction in DraftKings stock relative to its post-IPO ascent, it didn’t retrace more than 61.8% of the rise. We could argue that kept the upward tilt of its overall trend intact.

How to Trade DraftKings Stock

With the stock up almost seven bars in a row, the risk-reward is not as attractive as I would like. To respect the less-than-ideal entry point, I prefer higher probability theta plays over more directional delta trades.

The Trade: If you’re willing to bet DraftKings stock stays above $30, then sell the Aug $30 put for $1.35.

This is a naked put that obligates you to buy 100 shares of stock at an effective purchase price of $28.65. If assigned, this places your entry near the July 14 pivot low, which may not be a bad area to go long.

Tyler Craig is a member of the Chartered Market Technician’s Association and holds the CMT designation. His entire adult life has been dedicated to helping individuals learn how to trade as an elite instructor and personal mentor. To join his team and the best trading community on the planet, click here. At the time of this writing, Tyler held naked puts in DKNG.


Article printed from InvestorPlace Media, https://investorplace.com/2020/07/sell-puts-in-draftkings-stock-to-have-a-high-chance-of-profit/.

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