Market Overview
Before we jump into this week’s covered call idea, I wanted to address our May covered calls, five of which expired for full profits, and others that we need to adjust today.
First, here are the profits from the trades that expired in-the-money and which we don’t have a position in after expiration Friday:
UBER - $172 profit, or a yield of 5.26%
FTNT - $635 profit, or a yield of 10.82%
ON - $610 profit, or a yield of 8.25%
TXG - $290 profit, or a yield of 6.15%
DKNG - $150 profit, or a yield of 7.5%.
In terms of positions that did not finish in-the-money …
ONON is a tough call. The stock got hit hard on earnings, but is still well above our stop and because we collected a big premium when selling the May 30 call, our position is essentially at a breakeven.
Again, this is a tough call, but let’s sell our stock this morning, and walk away with an miniscule profit/breakeven.
RIG is another tough decision. The stock is above our stop, but has bounced above and below that level for a month.
Let’s sell our stock and take a loss of approximately 7%.
FCX is not as tough a call as ONON and RIG, as the trade never really worked as commodity stocks came under pressure. With the stock below our stop, we are going to sell our stock today and take an approximate loss of 12.42%.
Moving on …
This week we are going to jump right back into a stock we had success with last month, that is continuing its recent strength and has seen aggressive call buying activity.
The Stock – DraftKings (DKNG)
Why the Strength
DraftKings looks like a classic example of “romance-transition-reality,” where the firm’s land-grab (and huge spending) phase saw the stock do great (romance), followed by a horrific drop as investors re-valued the money-losing company in the bear market (transition phase), and now shares are doing well (reality phase) as spending has come down and cash flow looks set to turn positive.
The company, of course, looks like the leader in online sports betting, a market that continues to mushroom, and it’s also the top player in iGaming (online casino), which is smaller but doing well. But what’s causing the change in perception is that the firm (and sector) is out of the land-grab phase—customer acquisition costs are coming down, partly due to far fewer incentives and a bit less competition in newer markets, but general cost cuts and less marketing spend are helping too.
But despite that, customer retention and take rates are on the rise as the industry grows at a more normal (but still solid) pace; the net effect is that markets entered a few years ago have seen revenue and margins rise. Impressively, Q1 saw revenue growth actually tick up to a very strong 84%, and the top brass now expects DraftKings to get to EBITDA breakeven in the current quarter (ahead of the Q4 breakeven estimate released just a few months back). To be fair, growth will likely slow going ahead but remain solid (the full-year sales estimate is up 42%) while cash flow expands. It won’t be the go-go stock it was in 2020, but we think the future here is bright as institutions re-establish positions.
Technical Analysis
DKNG fell more than 85% from its 2021 peak to its low in May 2022 but then built a (very jagged) bottom for the rest of 2022. This year’s early rally was solid, but the real setup came in February and March, when shares built a tidy launching pad. The pre- and post-earnings breakout was strong, and DKNG’s recent dip toward the 25-day line came on very light volume—before some higher-volume buying showed up, including today’s upgrade-inspired pop. Stop — 20
The Covered Call Trade
Buy DraftKings (DKNG) Stock at 25, Sell to Open June 25 Strike Calls (exp. 6/16/2023) for $1, or a Net Price of 24 or less
Static Return: $100 per covered call (4.16%)
Breakeven: 24
Covered Call Return (if assigned): $100 per covered call (4.16%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 24 or less. (In this case 25 minus 1 = 24. Or another example is you could pay 25.25 for the stock and sell the call for 1.25, which also equals 24)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on May 31, 2023.
