2024 Annual Trade: DraftKings Straddle
2024 Annual Trade: DraftKings Straddle
By:Mike Butler
DraftKings is a liquid, high implied volatility stock that is affordable and offers a great trading opportunity in 2024
- In 2020 I entered a year-long trade in DraftKings, so I have experience trading this product.
- DraftKings is a liquid, high implied volatility stock that is affordable.
- This combination makes for high extrinsic value credit collections through the year, and the ability to withstand a lot of variances.
We all love a good sports bet, but I like DraftKings (DKNG) as a mid-priced stock with plenty of extrinsic value premium to offer premium sellers in the options market.
For my 2024 annual trade, I'm going back to the well with DraftKings. My goal for this trade is to collect as much extrinsic value as possible through the year, which will help me offset intrinsic value moves against whatever strikes I end up with at the end of the year.
The strategy
I'm starting with the strategy that gives me premium on both sides of the market and offers the most extrinsic value relative to buying power. That is the straddle, where I'm selling both the at-the-money put, and the at-the-money call at the same time in the same expiration cycle.
I'm starting with the Feb. 2 expiration cycle with 37 days to expiration, as that is the cycle just before the next earnings cycle. I sold the straddle for $3.98, which means my break-evens for February are +-$3.98 from the 35 strike. I want to be able to roll into the earnings cycle which will have a lot more extrinsic value, and that will offer me flexibility if I want to roll the strikes up or down.
In my video, DKNG Anatomy of a Trade, I highlighted the fact that collecting thousands of dollars in extrinsic value helped me keep the trade alive when it went from $45 to $70, back down to $10, and rallied from there back to $35 where I was able to exit for a tiny profit. Obviously not an ideal scenario, but not too bad considering the massive swings we have seen in this product over the years.
With an expected move of +-$13 through next year based on current implied volatility, if DKNG stock can stay within that range I should be able to collect plenty of premium to offset intrinsic value and we may have a nice trade at the end of the year. If it is outside of this range, the extrinsic value I collect through the year will help me offset losses.
Why DraftKings?
For a year-long trade, I like to focus on what I can control.
When selling premium on both sides of the market, that translates to high return on capital potential, which just means high extrinsic value collection relative to buying power. Stocks that are affordable that have high IV are where I typically like to trade, which translates to stocks in the $30-60 range with IV over 40%+.
This combination usually results in 20% return on capital (ROC) on the initial opening trade, which means through the entire year extrinsic value collections can pile up easily. The more I can collect in the form of extrinsic value, the more I can offset intrinsic value variance with in-the-money (ITM) moves.
Plans for defensive management
With a year-long trade, I don't have any exit plans. I will stay in the trade the entire year, which means my main goal is just to maximize my extrinsic value credits along the way.
Since I'm starting with a straddle where one side of the trade will always be ITM, I will look to roll out in time to the next monthly cycle when the stock is moving towards my strikes if I can help it. This will maximize my extrinsic value credit roll since extrinsic value is highest with ATM strikes. That means if the stock is above my straddle, I will roll when the stock is down on the day moving towards my strikes. If the stock is below my straddle, I will roll when the stock is moving up and towards my strikes in that scenario. I can manipulate the strikes further along the way, but that is the main idea - roll when extrinsic value credits are high and go from there.
Join me on Options Trading Concepts Live every market day at 11 a.m. CDT for periodic updates to the year-long strategy in DraftKings.
Mike Butler, tastylive director of market intelligence, has been in the markets and trading for a decade. He appears on Options Trading Concepts Live, airing Monday-Friday. @tradermikeyb
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