Draft Kings (DKNG) will report its fiscal Q2 results tomorrow before the opening. The company has reported one set of earnings since going public in Q1 in a SPAC transaction, which saw the stock jump 15% the following day on May 15. The options market is pricing about a 10% move in either direction tomorrow. With the stock near $35, the Aug 14th weekly 35 straddle (the call premium + the put premium) is offered at ~$3.50 (~10% of the stock price), and if you bought that, and thus the implied move you would need a rally above $38.50 or a decline below $31.50 by tomorrow’s close to make money. Obviously for those looking to define their risk and pick a direction and express that view through the weekly at the money call or put you would be risking about 5% of the stock price for one day.
The stock has been on a roller-coaster ride in 2020, up more than 200%, yet still down 22% from its early June high. Tension in the stock’s chart has been building making a nice little wedge, having earlier this week bounced off of the uptrend from its April lows and now threatening to break out above its downtrend from its June highs:
In a post back in May, I had the following to say about the scarcity of a play on sports betting in public markets:
Despite a hefty valuation, trading 26x last year’s $323 million sales that came on on a $147 million operating loss, Barron’s Andrew Barry suggested scarcity in the public markets for plays on online gambling could help buoy demand fo the shares:
With casinos closed and sports betting moribund, online casino-style gambling is a bright spot for the industry. Internet gaming revenue (excluding sports wagers) in New Jersey rose 66% in March, to $65 million, the state reports. The Garden State is a leader in online gambling, which includes slots and table games like blackjack.
Only a few states allow internet gambling, including New Jersey, Pennsylvania, and Nevada. But more than 15 permit online sports gambling, and even more allow sports betting at physical casinos. In a note, Morgan Stanley gaming analyst Thomas Allen says New Jersey’s online gambling revenue (excluding sports betting) should exceed $700 million this year, up from $483 million in 2019, as bettors shift from casino and online sports wagering. Covid-19, he writes, “could spur more states to legalize online casino and sports betting.”
On the topic of deregulation, I highlight the comment from the same post in May:
Also a very interesting discussion about the potential for increased openness by states that still ban sports gambling. See data below from Axios on sports betting.
There are no if and or buts about it, DKNG is a story stock, where traditional valuation metrics will not matter for the time being, especially as the reopening of sports and the potential need for states to find new ways to make up the hole in tax receipts from the recession, shares of DKNG could stay bid. I would also add that the stock’s performance and IPO via SPAC could cause the company to raise cash by selling shares giving them a capital cushion during what could be a difficult year to come given the state of sports. For instance, if the NFL was canceled revenue from daily fantasy and sports betting for a company like DKNG would be impaired.
So what’s the trade? If I were inclined to play for better than expected forward guidance and the stock to re-test the prior highs near $45 as we get closer to an NFL football kickoff in early Sept then I might consider the following call spread in Sept expiration:
Bullish Trade Idea: DKNG ($35) Buy Sept 35 – 50 call spread for $3.35
-Buy to open 1 Sept 35 call for 4.10
-Sell to open 1 Sept 50 call at 75 cents
Break-even on Sept expiration:
Profits of up to 11.65 between 38.35 and 50 with a max gain of 11.65 at 50 or higher
Losses of up to 3.35 between 35 and 38.35 with a max loss of 3.35 at 35 or lower.
Rationale: this trade idea risks 9.5% of the stock price, which is in line with the one day implied move tomorrow, breaks-even up 9.5% and has a max potential gain of 33% of the stock price if it is up 43% in a little more than a month. I know that sounds like an awful lot, but this is the market that we are in and when you consider the at the money call costs 5% of the stock price or half of this Sept call spread I would much prefer this trade idea than a binary trade in the weekly for earnings.
All that said, as regular readers know my view unless you have very high conviction that the earnings call will be a massive catalyst then I see little need to trade options, on the long premium side prior to results. If the earnings confirm you view the look to participate after.
ON a miss and guide lower, downbeat commentary on sports in the fall and possibly a secondary offering this stock is headed back to high possibly mid $20s. But the Sept 35 – 25 call spread offered at $3.70 does not look like an attractive risk-reward when I look at how a stock like PENN is trading in this market.