Here’s how I’m trading DraftKings ($DKNG) (May 19, 2020)DKNG NVAX
I want to look at DraftKings ( NASDAQ: DKNG ) and this is why: This is a stock that I haven’t really followed but I have more and more people asking me about it so I thought maybe I was missing something here and I was; not anymore though.
Here’s the thing, this is actually a stock that is simple to trade. The reason I am saying it’s simple is that the pattern is really, really clear. This is the 8-day exponential moving average right here. Each time the stock falls to the 8-day EMA that’s where the support is, so at some point it is going to stop doing that, kind of like it did here. It’s up here and then at some point it starts drifting sideways and then ultimately falls below the 8-day EMA so this is a real strong trend.
Then this is consolidation; consolidation, consolidation and now we are in the strong trend again. At some point, that strong trend is going to give way to a more sideways action. It could reverse, I don’t know, I don’t have a crystal ball so I don’t get to make that choice. What I can do is, I can protect my profits by selling calls and puts.
This is what we did at Option Market Mentor; I actually bought this stock on the 15th on this big day here. I bought the stock but I also sold the put and I sold the call. I bought the stock at 29.19 so a little bit below where it is right now but not much. So I buy it here at 29.19 and I sold the $30.00 call for $4.05 and I sold the $25.00 put for $2.65. So those options were super, super expensive because the stock was moving up so much, right? So I put all of this stuff on.
Well, guess what? The stock is up a little bit from where it was when I bought the stock and sold the call. So you would think that the call that I sold would also be up and I would actually be losing money on that $30.00 call but that’s not true, I have actually made 25 percent on that already. I sold it for $4.05, it went out at $3.00 today. How about on the put side? I sold that at 2.65, this is the $25.00 put, I sold it at 2.65 and now it is worth $1.40, I am almost at a 50 percent profit on that.
So what I actually managed to do was, I bought this strongly uptrending stock and it did keep going so that’s great. But I was able to sell these options, both of them out of the money, and they were so expensive momentarily that even though the stock is up a little bit more versus where it was when I put on this trade the options that I sold have actually shrunk in value.
This is one way, and it is called a covered strangle, this is one way that you could trade these super risky stocks that are moving so fast, you can trade it with some margin of safety. We did this with Novavax ( NASDAQ: NVAX ), we’ve done it with some other stocks recently. It’s a really good strategy and it’s the one that you want to be using when a stock is really, really moving fast. You want to take advantage of selling those options.