DraftKings (DKNG) reported Q2 earnings on Aug. 3 and today traders are piling into out-of-the-money DKNG put options in a near-term expiration. The amount of activity at this strike price likely implies bullish sentiment in DKNG stock.
The Unusual Stock Options Activity Report from Barchart on Aug. 16 shows that over 15,000 put contracts have traded today at the $25.00 strike price for expiration in 16 days (Sept. 1). This strike price is 10% below today's price of $27.82, which means that the strike price is deeply out-of-the-money (OTM).
This implies that short sellers of these puts have likely initiated much of the put options activity today. After all, given the $0.30 premium, the breakeven price is $24.70, which is $3.12 below today's price of $27.82, or 11.2%.
In other words, short sellers of these puts don't believe that DKNG stock will fall over 11.2% on of before the Sept. 1 expiration. They are happy to collect the 30 cents premium by shorting these puts, creating an income yield of 1.2% (i.e., $0.30/$25.00) with a little over 2 weeks to go.
Moreover, on an annualized basis, i.e., if this trade can be repeated every 2 weeks for a year, the annualized return is over 31%.
So, what is going on here - why are these put short sellers so bullish on DKNG stock?
DraftKings Earnings and Guidance Seem Positive
DraftKings, a major online and in-house sports betting company, reported that its revenue rose 88% year-over-year (YoY), $875 million vs. $466 million a year ago. However, the company is not yet profitable but measures its progress using a modified form of cash flow called EBITDA (earnings before interest, taxes, depreciation, and amortization).
Basically, EBITDA adds back to earnings all its non-cash charges and adjusted EBITDA also adds back stock-based compensation (i.e., options and restricted stock paid to employees).
Its adjusted EBITDA finally turned positive in Q2 at $72.97 million, up from a loss of $118.1 million. That seems to augur well for the company's cash flow progress going forward. This is despite the fact that its full-year 2023 adjusted EBITDA will likely stay negative.
But DraftKings now says that its fiscal Q4 guidance will be significantly positive. It projects between $150 million to $175 million in adjusted EBITDA based on $1.2 billion in revenue. That implies that its average adj. EBITDA margin will be 13.5%.
What This Means for Investors In DKNG Stock
This is very good news for investors in the company who want to see the company stop its cash bleeding. Granted, positive EBITDA is not the same thing as positive free cash flow, but it can easily lead to a reduction in cash outflow.
And it's not like the company will run out of cash until then. The balance sheet shows that there is $1.11 billion in cash and equivalents before the cash that is reserved for users. This shows that the company is very conservatively financed.
It also likely leads to the conclusion that DKNG stock may not have much further to fall. That is why a good chunk of the put options that traded today at the $25.00 strike price were likely sold short as initiating trades by bullish investors.
On the date of publication, Mark R. Hake, CFA 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.
