The Best Way to Trade This Stock While It Soars Higher

DraftKings (NASDAQ:DKNG) burst onto the public scene in late April, and it has been a market darling ever since. Eight days ago, its already delicious uptrend went vertical and DraftKings stock has risen almost 50% since.

The momentum is feeding on itself, creating a virtuous cycle. But the lofty perch might be giving would-be buyers pause. Today we’re exploring a popular options strategy that you can use to make chasing here safer.

DraftKings dodged a bullet with the timing of its IPO.

Had the digital sports entertainment and gaming company gone public just two months prior, it would have had to wind its way through the fastest bear market we’ve ever seen.

As luck would have it, however, the offering landed during a time when stocks were roaring higher amid reopening economies and unprecedented stimulus measures.

Let’s take a deeper dive into the price action.

DraftKings’ Beaming Stock Chart

Source: The thinkorswim® platform from TD Ameritrade

On the day of its IPO, DKNG bottomed at $17.60. The ascension to this morning’s high of $43.50 translates into a mouth-watering 147% gain. I’m not even going to entertain what that turns into on an annualized basis. It’s hilariously unrealistic, but it does underscore just how giddy the public has been now that they have a direct path to get exposure to the increasingly popular trends of fantasy sports and betting.

When it comes to trading freshly printed public stocks, five weeks can make all the difference. Five months would be better, but compared to the void of data available on the day of the IPO, five weeks gives you a lot to work with. Perhaps, most importantly, a trend has developed that provides multiple support and resistance levels to work around. The 20-day moving average is now on the chart and echoes the uptrend that has been in place since day one.

The sharpness of the current upswing confirms that the uptrend is increasing in momentum. That bodes well for the future and suggests that any pullbacks from this level will be quality buying opportunities. Volume patterns buttress the bullish view as well. Accumulation days litter the landscape and show a steady drumbeat of big buyers entering the stock, especially during the past eight days. Given the institutional backing, it’s going to take something substantial to sour the optimism.

It’s unlikely to come from earnings, however. The company just released their quarterly numbers on May 15, and the trend has done nothing but accelerate since. We now have three months of runway to play until the next report ushers in heightened uncertainty.

The biggest hurdle for buying here is the overbought pressures that are starting to mount after such a sizeable eight-day run. This is where options can help. Instead of purchasing now, how about getting paid to buy at a lower price?

When It Pays to Go Naked
The popularity of DraftKings stock demanded fast-tracking the listing of options contracts. The usual suite of expirations is available, including Weeklys. And the liquidity is fantastic. Open interest and the daily volume are in the thousands on most strike prices resulting in narrow bid-ask spreads and quick fills.

And, because of the elevated uncertainty and volatility surrounding a stock in its infancy, the premiums in DraftKings stock options are juicy. That makes for some attractive strategies like naked puts.

By selling puts with a strike price below the current stock price, you can get paid for your willingness to purchase shares at a discount to the current price. Instead of buying DraftKings stock at a steep price of $42.50, how about getting paid $330 to buy 100 shares at $35? Or, you could capture $150 if you’re willing to buy 100 shares at $30.

This type of strategy sets up a win-win scenario. If DraftKings remains above $30 or $35, then you simply pocket the cash you were paid upfront. If the stock sits below those prices at expiration, then you get to buy shares at a sharp discount to the current price.

You can pick your preferred buy price and payout of the following to trades:

Trade One: Sell the July $35 puts for $3.30.

Trade Two: Sell the July $30 puts for $1.50.

— Tyler Craig

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Source: Investor Place