DraftKings tumbled Wednesday, dropping over 10%. It may be worth switching to a short-term bearish view on the stock.
Traders who think DKNG stock will not reclaim the 50-day moving average in the next few weeks could look at a bear call spread option trade.
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower or sideways. It can also work even if it trades slightly higher, as long as it stays below the short call at expiry.
A DraftKings bear call spread using the Sept. 15 expiry and the 30-35 strike prices can be sold for around $1.
Traders selling the spread would receive $100 in option premium, which is also the maximum possible gain. The maximum loss would be $400.
Max Profit On DraftKings Trade
The spread will achieve the maximum profit if DKNG stock closes below 30 on Sept. 15. In that case, the entire spread would expire worthless, allowing the trader to keep the $100 option premium.
The maximum loss will occur if DraftKings closes above 35 on Sept. 15, which would see the premium seller lose $400 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
Where To Set Stop Loss
A stop loss could be set if the spread value rises from $1 to $2, or if DKNG crosses back above 30.
Because this is a bearish position, traders that think DKNG stock could move higher from here should not enter this trade.
According to the IBD Stock Checkup, DKNG stock is ranked No. 2 in its industry group and has a Composite Rating of 86, an EPS Rating of 67 and a Relative Strength Rating of 97.
Another bear call spread on Snowflake discussed last week can already be closed for near a full profit.
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Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
