A pair of down days developed in DraftKings (NASDAQ:DKNG) stock this week. However, the pause was well-deserved and healthy. If anything, it proved dip buyers were still alive and well. So says Wednesday’s beautiful bullish reversal candle formed by a rousing rebound off the lows. With that in mind, let’s explore why I remain optimistic for long trades in DKNG stock for the month.
Before diving into further details about its personal price action, consider first the broader market’s health. Equities just topped off their best month in ages. For the Russell 2000, November’s 18% rise was its largest single-month gain in history.
This should go without saying, but those types of runs don’t happen when sentiment is souring and the masses are avoiding stocks. On the contrary, such eye-popping stats belie the powerful bullish backdrop for stocks.
The Russell 2000 is laced with small-capitalization stocks and represents one of the riskier areas of the market. Investors only bid them to the moon when they’re optimistic about the U.S. economy’s future health. Historically, when the little guys lead, momentum stocks like DraftKings experience a wonderful tailwind.
And then, there’s seasonality. December brings gifts to boys and girls the world over, but it also delivers profits to investors. It hosts one of the most consistent seasonal patterns of the year — the Santa Claus Rally. While it’s technically just a seven-day run at the very end of the year, its effects typically buoy stocks earlier in the month as well.
Moreover, I could go on about other bullish narratives like the novel coronavirus vaccine and the market trend’s fantastic technical conditions; But you get the point. Stocks reside in a sweet spot, and it’s one that makes me more willing to buy the kinds of patterns that DKNG stock is offering.
DKNG Stock Chart
Click to Enlarge
Since shares of the digital sports entertainment and gaming company found a bottom in early-November, they’ve been building a consistent uptrend. The series of higher pivot highs and lows remains unbroken. Spectators have been trained to buy the dip in the creation of a positive feedback loop. That said, this week’s pullback created yet another opportunity to strike while the risk was low, and the potential reward was high.
Along the way, prices pushed above both the 20-day and 50-day moving averages, signaling buyers have wrested back control of the short-term and intermediate-term uptrends. Similar to the rest of the market, volume patterns have weighed heavily in favor of bulls. Participation during advances has been growing, while few have departed on down days.
The past few days of downward movement built a bull flag pattern that appears ready to resolve itself higher. Thus, I’d peg $55 as the first upside target. And if shareholders are lucky, the stock will soon revisit its peak near $64.
Cheap Premiums Point to Call Spreads
With the latest earnings report fading in the distance, implied volatility has been sinking. Recently, it fell to a new low at 73%. I expect the cheapening to continue the further we get from the IPO, though. There’s a maturing process that happens as freshly minted companies find their footing.
On an absolute basis, the current reading of 75% is still high enough to make selling premium interesting. Honestly, though, you can take your pick when it comes to strategy selection.
With that in mind, here are my favorite two plays. The first offers more reward but a lower probability of profit. The second offers more probability but a lower overall profit:
Bull Call Trade: Buy the Jan. $55/$60 bull call for $1.40.
If prices can rise above $60, then you’ll pocket the max gain of $3.60. The initial cost of $1.40 is the max loss.
Bull Put Trade: Sell the Jan. $40/$35 bull put for 60 cents.
Consider it a bet that DKNG stock sits above $40 at expiration. The max gain is 60 cents, and the max loss is $4.40.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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