DraftKings stock is experiencing a minor pullback in an otherwise solid uptrend. It's also a stock with relatively high implied volatility, which means option premiums are likewise high.
That can be great for option sellers.
For traders wanting to take advantage of the high volatility on DraftKings stock, a cash-secured put could be an attractive way to potentially buy the stock for a discount. Here's how a cash-secured put trade might look on DraftKings.
As a reminder, a cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price. It's important that anyone selling puts understands that they may be assigned 100 shares at the strike price.
How The Cash-Secured Put Works
Let's assume we're happy to buy 100 shares of DraftKings stock at 42.50 any time between now and Oct. 17.
Selling an Oct. 17 strike put at 42.50 would generate around $95 in premium. The put seller would have the obligation to purchase 100 shares of DraftKings stock at 42.50 if called upon to do so by the put buyer.
Calculate the break-even price for the trade by taking the strike price less the premium received. In this case, that gives a break-even price of 41.55. That's 8.4% below the current price of 45.35 as of this writing.
If the stock stays above 42.50 by the expiration date, the put expires worthless. That leaves the trader with a 2.3% return on capital at risk. Further, that works out to around 22% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade will suffer a loss. But investors partially offset that loss by the premium received for selling the put.
The maximum loss on the trade would occur if DraftKings stock fell to 0, which would see the trade lose $4,155. However, most traders would cut their losses beforehand.
DraftKings Stock: No Earnings Risk
DraftKings has already announced second-quarter earnings, so there should be no earnings risk with this trade.
Cash-secured puts are a fantastic way to generate a high return on stocks the investor is happy to own. If the put does get assigned, the investor takes ownership with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position.
Investor's Business Daily gives DraftKings stock a Composite Rating of 93 out of a best-possible 99, an Earnings Per Share Rating of 79 and a Relative Strength Rating of 79. According to IBD Stock Checkup, DraftKings ranks third in its group.
It's important to remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
