Trade Ideas October 21, 2020

On Like DKNG

by Dan

Shares of DKNG are up 296% on the year, but down 30% in the last couple of weeks. The recent pressure on the stock has been the result of a lockup expiration which resulted in the pricing of 38 million shares in a secondary offering at $52 on Oct 7th.

The stock is now at a key technical support level, the uptrend from its early April lows, and just below its breakout level from a month ago near $45:

 

It is worth noting the timing of the selloff is coming as the NHL, NBA has wrapped up and now the MLB is at most six games away from completing its abbreviated season, and it feels like every Saturday and Sunday we wait with bated breath for football to have postponements. We went from NO sports in the spring and summer, to too many sports in late summer early Fall to very soon to just having Football. I wonder if investors are gaming DKNG’s lumpiness to their daily fantasy and sportsbook business and looked to sell shares before we get some sort of winter drought before hoops and hockey start back up. There of course is still The Masters coming next month and no shortage of partnerships for the company to talk about (Micahel Jordan, ESPN etc) which could serve as near-term catalysts in and around their earnings report that might help turn the sentiment tide.

DKNG will report its third-quarter as a publicly-traded company on Nov 13 and we might see a sentiment shift as buyers of the secondary have puked out of shares over the last couple of weeks and we see a bounce off of technical support, back above the secondary price.

If I were looking to express this view I would look to do so with defined risk as there is an air pocket below the uptrend between $40 and $35.

Bullish Trade Idea: DKNG ($42.55) Buy Nov 45 – 55 call spread for $2,50

-Buy 1 Nov 45 call for 4.25

-Sell 1 Nov 55 call at 1.75

Break-even on Nov expiration:

Profits of up to 7.50 between 47.50 and 55 with max gain of 7.50 above 55

Losses of up to 2.50 between 45 and 47.50 with max loss of 2.50 below 45

Rationale: this trade idea risks 6% of the stock price to possibly make up to 17.5% if the stock is up 30% in the coming month.

 

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