DraftKings stock is currently sitting at No. 8 in the IBD 50 and is trading above rising 21-, 50- and 200-day moving averages. So, let's take a look at how a cash secured put trade might look on DKNG stock.
DraftKings is a leading online sportsbook, digital casino, and daily fantasy sports operator. The stock has 461.9 million shares outstanding, a float of 397.2 million shares, and a market value approaching $11 billion.
On May 4, the Boston-based firm reported better-than-expected Q1 earnings and sales results. The company lost 87 cents a share on sales of $769.6 million. Management expressed confidence that annual revenue will surpass $3 billion.
According to IBD Stock Checkup, DKNG stock ranks 4th in its group. The stock holds a Composite Rating of 90, an EPS Rating of 47 and a Relative Strength Rating of 96.
DKNG Stock Today
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As a reminder, a cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal? Either have the put expire worthless and keep the premium, or to get assigned DKNG stock and acquire shares below the current price.
Anyone selling puts should understand that they may be assigned 100 shares at the strike price per contract.
Let's assume we're happy to buy 100 shares of DKNG stock at a price of 22.50 any time between now and Aug. 18. Selling an August 18, 22.50 put would generate around $2.10 in premium per contract, or $210 for a block of 100 shares, based on Wednesday's afternoon trading. The put seller would have the obligation to purchase 100 shares of DKNG stock at 22.50 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, this gives us a break-even price of 20.20. That's 12% below Tuesday's closing price.
If the stock stays above 22.50 at expiry, the put expires worthless leaving the trader with a healthy 11.4% return on capital at risk. That works out to around 44% on an annualized basis.
Limiting Risk On DKNG Stock
The main risk with the DKNG stock trade is similar to outright stock ownership. If the stock falls precipitously, the trade will suffer a loss. However, the loss will be partially offset by the premium received for selling the put.
The maximum loss on the trade would occur if DKNG stock fell to $0. This means we would see the trade lose $2,020, but most traders would cut their losses before then.
A stop loss could be set if MRK stock drops 8% from the time of selling the put.
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 with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position.
Remember that options are risky and investors can lose 100% of their investment.
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
