Trading DKNG: More Upside or In a Range?
Will shares of DraftKings make new highs or is it time to sell covered calls heading into the second half of the year? A look at different strategies to collect cash.
This service is for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice. These are my opinions and observations only. I am not a financial advisor.
After a week off and a much needed break I am looking forward to the second half of the trading year. There are many opportunities in front of us.
If you weren’t following along on Twitter, or just missed it, I spent a week in Las Vegas playing in the World Series of Poker and what a great time it was!
I do this once a year and always enjoy it (even when I don’t win, like this year). It gets the gamble out of the system.
Coincidentally the chart I’m focused on this week is for DraftKings (DKNG). This is just how the cards were dealt. So let’s get right to it!
The daily candles have been moving sideways, consolidating, but trending up. On Friday DraftKings broke above $26.40, a key resistance level, and closed at $26.65.
The lowest end of the consolidation channel is at $22.75 with an accumulation zone between $22.75-$23.30. There are many layers of support to break to get back to these buying levels so they are basically out of play for now.
The mid range appears to be holding, allowing for accumulation between $24.30-$25.85, which is actually fairly wide. The 50-day SMA could be used as the low end tightening up to about $24.50.
That all said, the most appealing characteristic of this chart is the higher highs and higher lows on the daily candles.
Here is the same chart, adding in the green circles to highlight the bullish pattern.
The chart reflects continued positive sentiment and support which could lead to another move higher. How will we know?
One sign I am going to look for is a retest of the $26.40 level but instead of breaking down, I am looking for support and a bounce!
It would be on this bounce that I would consider accumulating shares between $26.40-$27.00 or looking to trade at-the-money (ATM) call options or call spreads.
If we see the bounce off of support at $26.40, I like considering the July 21st expiration, buying the $27 strike calls and selling the $28.50 for a net cost of about $0.50 with an opportunity to triple.
Any way you trade it, I like using the 20-day SMA as your stop loss which should come up to about $25.75 to start the week.
What about a rejection?
DKNG is also worth watching for sideways action and opportunities to sell options and collect nice premiums.
The shares have struggled to get above $26.40 and another failed attempt would not be the end of the world because it could present opportunities for selling covered calls or cash secured puts.
If you already own 100 shares and we see a pull back below $26.00 I like selling covered calls at the $27 strike, going out one or two weeks for expiration.
The $28 strike would be a more conservative approach, bringing in less cash but allowing more room to run. Either works, it really comes down to preference.
Accumulating shares between $24.30-$24.85, as mentioned earlier, is a slightly riskier approach at an area of support that might prove to hold up.
Another option is to wait for a retest near $22.75-$23.30 and accumulating in this zone instead. I like this option better but again, it may not present itself.
One last consideration in this scenario is selling cash secured puts (CSP).
A cash secured put requires you have enough cash in your account to buy 100 shares of the stock at the strike price you sell the puts at.
If DKNG drops to near a buy range, you could consider selling CSPs at the buying range strike price. If the shares bounce and move higher you will keep the cash collected but if they drop you could be buying shares at the strike price.
That said, you will have collected cash in addition to the shares so effectively you are using the CSP to buy shares at a discount to the price you think is a good buy point, the strike price.
It is never easy to say which direction the market or a stock will go so having multiple trading plans to work with is ideal.
This week I think the opportunities in DKNG will be presented and hopefully my thoughts here are helpful for you!
One last note. I’ve mentioned the Discord Server that I am launching and I had aimed for June. Just a one month delay! More coming for the launch in July.
The server will have all of my trading plans, trading levels, and education updated daily complete with a community of like minded traders. Coming soon!
The Trading Triangle - Live on YouTube!
If you are looking to sharpen your chart analysis skills further while hearing about what traders are looking at for possible trade ideas, be sure to also tune into A Trader’s Education podcast.
Streaming live on YouTube, I host The Trading Triangle to provide a more robust analysis complete with video. Be sure to subscribe and tune in every Sunday!
You will still also be able to find recordings of the stream on the A Trader’s Education podcast, which you can find on both iTunes and Spotify.
It is packed with value and always an all around great time!
Shaun Clarke - @ShaunClarke_ and Kaye @InvestKaye join me every week. You don’t want to miss it!
Thank you again for reading and have a great week!
Nate
Thanks for sharing!