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.
Options trading is not suitable for all investors. Your TradeStation Securities’ account application to trade options will be considered and approved or disapproved based on all relevant factors, including your trading experience. See Characteristics and Risks of Standardized Options. Visit www.TradeStation.com/Pricing for full details on the costs and fees associated with options.
