DraftKings stock continues to show relative strength. The consumer spending play recently got added to the SwingTrader portfolio. Let's take a look at how a cash-secured put trade might look on DKNG stock.
DraftKings, a leading online sportsbook, digital casino and daily fantasy sports operator, was also the IBD Stock Of The Day recently as it rides March Madness to a proper buy point.
As a reminder, a cash-secured put involves writing an at-the-money or out-of-the-money put option. A trader also sets aside enough cash to buy the stock. The goal here? Either have the put expire worthless and keep the premium, or get assigned DKNG stock and acquire shares below the current price.
Traders selling puts must understand they may be assigned 100 shares per contract at the strike price.
Let's assume we're happy to buy 100 shares of DKNG stock at a price of 42.50 any time between now and April 19.
DKNG Stock Today: The Trade
Selling an April 19-expiration put option with a 42.50 strike price would generate around $150 in premium, based on recent trades. The put seller would have the obligation to purchase 100 shares of DKNG stock at 42.50 a share if called upon to do so by the put buyer.
Calculate the break-even price for the trade by taking the strike price less the premium received.
In this case we see a break-even price of 41.00. That's 6.4% below Tuesday's closing price.
The Happy Price Zone
If the stock stays above 42.50 at expiry, the put expires worthless, leaving the trader with a healthy 3.66% return on capital at risk. That works out to around 43% on an annualized basis.
The main risk with the trade mirrors outright stock ownership. If the stock falls precipitously, the trade will suffer a loss. However, the loss gets partially offset by the premium received for selling the put.
The maximum loss on the trade would occur if DKNG stock fell to zero. The trade would lose $4,100 per option contract. But most traders would cut their losses before then.
A stop loss could be set if shares drop below 41.86.
Cash secured puts are a fantastic way to generate a nice return on stocks the trader is happy to own. If the put does get assigned, the investor takes ownership of DKNG stock with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position.
DKNG Stock's Leadership Qualities
According to IBD Stock Checkup, DKNG stock ranks 3rd in its group and has a Composite Rating of 86, an EPS Rating of 69 and a Relative Strength Rating of 96.
Please remember 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 X/Twitter at @OptiontradinIQ
