Someone could be hedging their bets in sport-betting stock DraftKings (DKNG).
Check out this options activity yesterday morning:
- A trader purchased 27,000 October 10 puts for $0.94.
- At the same time, he or she sold 27,000 October 15 calls for $1.59.
- There was no open interest in either contract, which indicates a new position was opened.
Calls fix the price where investors can purchase a stock. They can also sell calls to generate premium in return for agreeing to deliver shares at a future date. Puts lock in a selling price, so they can make money to the downside. Each contract represents 100 shares.
Selling calls and buying puts puts is a risky bearish combination. However the options may be connected to a position in DKNG shares. Then it would be a “collar” hedging strategy. We’ll explain below.
Hedging With Options
DKNG rose 1.2 percent to $13.02 yesterday. The stock traded as low as $9.80 on May 12 before rebounding. Say an investor bought 2.7 million shares near the low and is sitting on a modest profit. He or she might be using the collar to protect their long position.
The strategy paid them a net credit of $0.65 per share, the difference between the what they paid for the puts and received from selling the calls. That locks in a minimum selling price of $10 and a $15 maximum. The transaction manages their risk over the next three months, including the next quarterly report in August. They’d effectively sell into a rally and have limited downside risk.
DKNG peaked above $70 in March 2021 amid excitement about the potential of legalized sports betting. It’s declined since then as investors unloaded high-multiple growth stocks.
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