DraftKings ($DKNG) is still on a run. Here’s how I’m playing it. (May 26, 2020)
DKNG
I am looking at DraftKings ( NASDAQ: DKNG ); this is my biggest position. I am trading it typically a little larger than I would usually do if it was just stock. What I am doing is, I am trading it with calls and puts as well as stock. I just want to explain how I am doing this.
The implied volatility in this stuff is actually pretty high. The options are really, really expensive; the implied volatility is 92 percent, that’s kind of high. What that means is, options are super expensive. The stock broke out today on heavier than average volume, that’s the average volume over the last 20-days. But for crying out loud, look at the way the volume has been over the last 20-days, it has really dragged this average up. So the fact that we are back up above the 20-day moving average of volume on this kind of move is really, really impressive, this is really impressive. But it is kind of risky to buy here; I added to my position today, I bought some of this stuff.
This is how I did it: I bought the stock and then I sold some out of the money calls to bring in extra money. For example, I can sell and did, I can sell the $40.00 calls; which are clear up here, I can sell the $40.00 calls for $1.15. The stock is at less than $35.00 and so I am obligating myself to sell the stock at $40.00 if the stock hits that price. Of course, if it doesn’t, I would love to sell it at 40.00 but I won’t be forced to because the stock is lower. So if it goes above 40.00 I have to sell it at 40.00 but I got paid $1.15 for taking on that obligation, $1.15 per share.
Oh, but wait, there’s more. I also decided if this stock pulls back, anything could happen, but if it pulls back I would be fine obligating myself to buy some more stock at say, $30.00. And so what do I do? I sell puts at $30.00. So I am obligated to sell the stock at $40.00; I am obligated to buy the stock back at $30.00. And what do I get for that? I get about $1.45, we’ll say it’s $1.50. So I get $1.50 for obligating myself to buy the stock down here and I get another $1.15 for this. So that is 2.65; I am getting paid $2.65 a share and in return I have to sell the stock at 40.00 and buy it at $30.00.
With that kind of a hedge I can make really good money and sleep pretty well at night; because if the stock pulls back I know I am going to get to keep the money on the calls. If the stock runs higher I know I am going to get to keep the money on the puts. If the stock stays the same that’s okay too because I am making money on the lapse of time in the $40.00 calls and the $30.00 puts. So you can make this type of trade all of the time on all kinds of stocks that are trending higher, it’s called a covered strangle.
I just wanted to give you the heads up on DraftKings ( NASDAQ: DKNG ). I really like the way this stock is trading. It is not the typical breakout of consolidation, this is just a really strong uptrending stock and who knows how high it’s going to go? It might go to $35.00 and crap out or it might go to $55.00, I don’t know. But as long as this trend is intact I’m good to go.
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