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DraftKings Stock Has an Over/Under of $27.50 as a Potential Breakout Looms

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DraftKings (NASDAQ:DKNG) stock is finally starting to show some strength after a prolonged decline.

DraftKings (DKNG) website in browser with company logo
DraftKings (DKNG) website in browser with company logo

Source: Postmodern Studio / Shutterstock.com

DKNG stock had hit the lowest levels since May 2020 before subsequently heading higher, a pullback was likely warranted given the rip-roaring rally that preceded it.

The selling has now come too far, too fast though. Trading at around $23 today, it’s time to be a buyer of DKNG on any further weakness.

InvestorPlace - Stock Market News, Stock Advice & Trading Tips

There are a few reasons to be optimistic on DraftKings for the foreseeable future.

The recent approval of online sports betting in New York is a definite positive for DKNG stock. InvestorPlace contributor David Moadel highlighted the move into the metaverse and NFT space. Combined, these should serve to buoy the share price going forward.

The analysts agree that DraftKings is heading higher. TipRanks shows the average rating at Moderate Buy with a price target of $48.24. This implies a nearly 80% upside from the current price of DKNG stock.

Technical Take on DKNG Stock

DKNG stock two year price chart
DKNG stock two year price chart

Source: The thinkorswim® platform from TD Ameritrade

DraftKings is looking appreciably better on a technical basis. Shares once again reached deeply oversold readings on a 9-day RSI basis before strengthening. MACD remains solidly in positive territory. Momentum continues to climb and is making higher lows.

DKNG traded back up to the 20-day moving avegare at $27.63 before pulling back slightly.

There is major overhead resistance at $27.50 which also equates to the 20-day moving average. This is the critical area to watch for DKNG going forward.

It is even more valid given the magnitude of the previous drop and that it occurred at a critical technical juncture. A meaningful breakout beyond the $27.50 level could propel DraftKings stock sharply higher.

Implied volatility (IV) is still extremely elevated. Currently, it sits at the 70th percentile. This means option prices are comparatively expensive which favors selling strategies when constructing trades.

So to position bullishly in a defined-risk way, an out-of-the-money bullish put credit spread makes probabilistic sense. It is similar in nature to my previous trade on DKNG stock that ended up being fully profitable.

How to Trade DraftKings Now

Sell the Feb. $25 puts and buy the Feb. $22.50 puts for an 80 cents net credit

The potential maximum gain on the trade is $80 per spread if DKNG stock closes above $25 at February expiration. The maximum risk is $170 per spread if DKNG stock closes below $22.50 at February expiration. Return on risk is 47% ($80/$170).

The short $25 put strike price provides a 7.2% downside cushion to the $26.94 closing price for DratfKings stock.

Earnings aren’t expected until late February in DKNG stock. The spread will expire before then on February 18. This will serve to help dampen volatility and eliminate any earnings-related risk.

On the date of publication, Tim Biggam did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Tim spent 13 years as Chief Options Strategist at Man Securities in Chicago, 4 years as Lead Options Strategist at ThinkorSwim and 3 years as a Market Maker for First Options in Chicago. Tim makes weekly appearances on Bloomberg TV “Options Insight”, Business First AM “Trader Talk”, TD Ameritade Network “Morning Trade Live” and CBOE-TV “Vol 411” to discuss everything from volatility and option related. He has also been invited for reoccurring appearances on CNBC’s Volatility Playbook.

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