Worried Ahead of DraftKings’ (NASDAQ:DKNG) Earnings? Consider This Options Strategy
Analyzing the recent earnings performance history of online sportsbook DraftKings (NASDAQ:DKNG), questions arise about the company being able to continue its win streak. Analysts are bullish on the sports betting firm, but DKNG has outperformed their price targets, and options flow screeners hint at major traders’ growing pessimism. While the potential for more positive legal developments makes me long-term bullish on DKNG stock, cautious investors may want to hedge their portfolios with a particular options strategy.
Jittery About DKNG Stock? Options Can be Your Answer
Given that TipRanks covered much of the fundamental angles of DKNG stock, I’d like to focus on options-related mechanics instead. For more information, investors can read about the compelling narratives presented by David Moadel – who presented both the bull and bear case – and Steve Anderson, who highlighted the company’s intriguing partnerships.
Personally, I anticipate that the states that currently don’t allow online sports betting will eventually cave to pressure. Obviously, the big two are California and Texas. If these two giants legalize the practice, it could be lights out for the active pessimists of DKNG stock. Still, the legal framework presents incredible complexities and sensitivities. It’s no guarantee.
Further, the company has been a massive winner. DKNG stock has gained over 23% year-to-date and soared 170% in the trailing year. Contrarian logic dictates that a correction could be coming, and that’s what options flow data indicates. Increasingly, large transactions for bought puts and sold calls have been pouring in, suggesting institutional pessimism.
With this new reality, traders’ first instincts may be to consider a long straddle tactic. This action calls for buying a call and a put at the same strike price with the same expiration date. Mainly, the idea here is to bid on volatility. If DKNG stock shoots higher following earnings, the put expires worthless, but the call wins. On the flip side, if shares plummet, the put wins, and the call expires worthless.
A long straddle seems like a no-brainer, but here’s the problem. DKNG stock recently closed at $43.61, so we’d probably target the $44 call and put, both of which expire on February 16, the day after earnings. However, they’re expensive, with the call costing $267 ($2.67 contract price multiplied by 100 shares) and the put costing $297.
Since you’re paying a premium of $564 no matter what, the DKNG option would need to jump 111% to break even on the call side. That’s an awfully stiff wall, which then segues into a possibly superior strategy — the married put.
Put a Ring on DraftKings Puts
Let’s assume that you’re bullish on DKNG stock, but you’re also worried about a true stinker following its earnings report. In this case, you can go long the security in the open market while also buying a put option in the derivatives market.
Think of this married put strategy as buying insurance for your portfolio. If you buy 100 shares of DKNG stock, it will cost you $4,361 (assuming no other fees) based on its current price. Further, buying the $44 put – which again costs $297 – protects you from severe downside. If the market, for whatever reason, didn’t like what management had to offer, you can at least profit from the ensuing red ink.
Now, $297 may seem pricey because the insurance protection only lasts for one session following earnings. Therefore – just like in real life – you don’t want to keep marrying and remarrying. Otherwise, you may start going backward financially.
Another approach could be to modify your married puts. Let’s say you’re willing to accept a certain amount of volatility because you’re a patient investor. Suppose you’d be okay with up to a 10% loss but nothing beyond that point. In this case, you can buy your protection with the DKNG Feb 16 ’24 39.00 Put.
Here, the key advantage centers on the lower cost. At only $77, it’s a far less costly insurance wager. However, the downside is that because the option has almost no time value, the put will likely expire worthless if the fallout isn’t severe enough.
Finally, it’s also possible to unbalance or skew your long straddle. Suppose you do see a higher probability of upside than downside. You can choose to buy the cheaper DKNG Feb 16 ’24 45.00 Call as well as the cheaper DKNG Feb 16 ’24 42.00 Put. Nevertheless, the risk is that DraftKings must make a larger swing to “activate” either the call or the put.
A Narrative-Based Idea
Primarily, the reason to consider various options strategies for DKNG stock lies in the underlying financial performance. Over the past few years, DraftKings has represented a growth monster. However, to Moadel’s point, the company has beat earnings expectations without actual earnings. In other words, DKNG is a narrative-based idea.
Still, many investors appreciate the idea. As stated earlier, a few more legal victories and the floodgate of demand could open. Until then, a cloud of ambiguity hangs over DKNG stock. Then again, that very unpredictability gives DraftKings its upside potential.
Is DraftKings Stock a Buy, According to Analysts?
Turning to Wall Street, DKNG stock has a Strong Buy consensus rating based on 24 Buys, two Holds, and one Sell rating. The average DKNG stock price target is $42.77, implying 1.9% downside risk.
The Takeaway: Use DKNG Stock Options to Insure Your Position
In anticipation of DraftKings’ earnings release, investors face a conundrum — how to protect their positions amid uncertainty while capitalizing on potential upside. With the history of DKNG stock outperforming expectations and mixed sentiment in the options market, strategies like the married put emerge as a pragmatic solution, offering insurance against downturns without sacrificing bullish convictions.
In addition, investors have other mechanisms in the derivatives market to make use of based on their risk-reward profiles.
