DraftKings broke out past an alternative entry Wednesday, closing up 4.6% for the day. The stock was also added to the IBD SwingTrader portfolio.
Investors who think DraftKings stock will continue to rally could do so in a reduced risk way, with the use of options.
Let's take a look at how we can use options to find a favorable risk-to-reward trade on the assumption that DraftKings might move toward 50 in five weeks.
We will look at a bullish diagonal spread which allows traders to go long on the stock without risking too much capital.
A bullish diagonal spread is a trade that involves buying a call option and selling a shorter-term, out-of-the-money call option against it.
Buying the May 16, 2025, 40-strike call will cost around $1,310. Selling the June 21, 2024, 50-strike call option will generate around $90 in premium.
DraftKings Stock Trade Could Return 28%
That results in a net cost for the trade of $1,220 per spread, which is the most the trade can lose.
The maximum profit is estimated at around $340. But that can vary depending on changes in implied volatility. The maximum profit would occur if DraftKings closed right at 50 on June 21 and it represents a return of around 28%.
The idea with the trade is that if DraftKings stock trades up to around 50, the diagonal spread will increase, resulting in a net profit.
A bullish diagonal spread is a good way to gain some upside exposure on a stock without risking too much if the move doesn't materialize.
The combined position has a net delta of 46. That means it is roughly equivalent to owning 46 shares of DraftKings, although this will change as the trade progresses.
Exit Strategy For Option Trade
The suggested stop loss level is a close below 43.
According to the IBD Stock Checkup, DraftKings stock is ranked No. 2 in its industry group. It has a Composite Rating of 80, an EPS Rating of 80 and a Relative Strength Rating of 92.
DraftKings reported earnings on May 2, so this trade should have no earnings risk if held to expiration.
Please 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, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
