The first week of trading in 2024 is almost in the books. It hasn’t been a good start.
As I write this before Friday’s open, the S&P 500 is down 1.7% from the end of 2023, and today’s trading is trending lower due to a solid jobs report. December’s nonfarm payrolls showed 216,000 jobs were added last month, 41,000 higher than expected, leaving the unemployment rate at 3.7%. Estimates suggested it would creep up to 3.8%.
A strong jobs report translates into a lower probability that the Federal Reserve will cut interest rates when it meets in March. The odds of a 25 basis point cut a week ago was 100%. It’s been nearly halved to 54%.
That’s a killer for stocks. As a result, the March E-Mini S&P 500 futures are down 0.36%, hitting a three-week low.
With this negative outlook for the day, I’ve got to come up with an angle about unusual options activity for today’s commentary.
Since this is a big time for sports betting -- the College Football Playoff National Championship game is January 8 and the NFL playoffs are just around the corner -- I thought writing about DraftKings (DKNG) was appropriate.
I like DraftKings as a stock. Americans love betting on sports. It will continue to gain a lion’s share of the betting action in 2024.
DraftKings’ volume wasn’t extraordinary on Thursday -- it was 79,431, nearly 20% higher than its 30-day volume -- but it did have five unusually active options yesterday, one of them with volume of 18,672, 166.71x its open interest. That’s not something you see very often.
As I said, there were five unusually active options yesterday. Here’s what I think is the best buy of the bunch.
Have an excellent weekend!
4 Calls and a Put
Like the Sesame Street song, One of These Things is Not Like the Others, the Jan. 12 $33 put stands out from Thursday’s four unusually active call options.
Expiring next Friday, the put had a Vol/OI ratio of 4.27, which is moderately high but not nearly as hot as three of the four calls, one of which I mentioned in the intro. The bid price on the put was $0.91, providing an annualized yield of 146% based on DraftKings’ closing price of $32.88.
So, the net price you would pay should you have to buy the shares is $32.09, less than a buck below its share price. DKNG early in Friday trading is up 35 cents. Its shares are down nearly 9% over the past five days, so it could be ready to rebound.
In the long term, buying DKNG shares in the low $30s should be profitable, but it won’t be without some volatility. They’re up 238% over the past five years but well down from their March 2021 all-time high in the $70s.
If you’re bullish about DraftKings stock and don’t mind the income, this is a relatively low-risk play.
7 Days to Expiration
All four of the calls from Thursday are relatively near-term plays. That said, I’m not asking you to play in the wild-and-wooly world that is 0DTE, short for zero days to expiration. That’s a bet I’m not inclined to consider, but that doesn’t mean you shouldn’t. Everyone’s focus doesn’t have to be the same. It would make options boring, which, of course, they’re not. But I digress.
Starting from the nearest expiry and working our way out, two calls were expiring on Jan. 12. The $34 strike had an ask price of $0.49 with a delta of 0.33197, while the $35 strike’s ask was $0.26. The former’s down payment was 1.4%, while the latter was 0.74%.
If preservation of capital is your greatest concern, going with the $35 strike makes more sense. Furthermore, you can double your money on the $35 strike if the shares move $1.35 higher over the next week, 13 cents less than the $34 strike.
However, there’s a reason the $34 had a Vol/OI ratio of 7.33, nearly 5x greater than the $34. The former only has to increase by $1.61 for you to consider exercising your right to buy, while the latter needs to rise by $2.38 to consider doing so. That’s 48%.
The difference between losing $49 and $26 might seem like a lot, but if you have the mindset that you're in this to buy the stock for the long haul, you’ll end up saving $65 on your purchase of 100 shares, more than you put at risk.
If it were me, I’d go with the $34 strike.
The Other $34 Calls
We’re left with the two most unusually active call options from Thursday.
First, there is the Feb. 2 $34 strike. Its Vol/OI ratio was 7.87. It expires in 28 days. Its ask price of $1.28 is a down payment of 3.8%. Anything below 5% is attractive from a risk/reward proposition.
So, you’ve got a month for the share price to increase by at least 8% to consider exercising your right to buy 100 shares. With a delta of 0.43403, you can generate a 50% return on your option by selling it before expiration, up 4% from $32.88.
If you believe the worst is over for DraftKings’ most recent swoon, buying this call gives you three additional weeks to accomplish the same thing as the $35 strike expiring next Friday.
Lastly, we’ve got the most unusually active call option (DTEs of 7 days or longer) from Thursday’s trading.
The March 15 $34 call expires in 70 days. It had an ask price of $2.86 for an 8.4% down payment on 100 shares. Above, I referenced 5% as the ceiling for favorable risk/reward propositions, which means it’s probably not appropriate for anyone who can’t handle the idea of losing $286 per contract should it fail to move higher.
But consider the pros of buying this call.
The delta was 0.51106. You can double your money by selling the call before expiry if the share price moves $5.60 higher (17%) over the next 10 weeks. In November, its share price increased by 33% in five days. It’s more than possible.
Let’s assume DKNG moves 33% higher over the next 70 days. Based on yesterday’s close of $32.88, we’re looking at a share price of $43.73. If that occurs, you’ve effectively bought 100 shares of DKNG at a 25% discount [$43.73-$32.88].
If you’re an aggressive investor and don’t mind the $286 down payment, it’s easy to see why the call had a volume of 18,672 yesterday.
It’s the best of the bunch.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
