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Draftkings (DKNG) Earnings Preview, Sports vs Covid and Call vs Call Spreads
3 min read

Draftkings (DKNG) Earnings Preview, Sports vs Covid and Call vs Call Spreads

Draftkings (DKNG) Earnings Preview, Sports vs Covid and Call vs Call Spreads

  • DraftKings (DKNG) reports earnings tomorrow before the open (~7:00am)
  • Options are pricing in about an +/-8.3% (about $3) move by tomorrow's close in either direction.
  • Its expected move over the next 30 days is close to 19%.
  • The prior earnings in May saw an actual one day move following earnings of +15%.

The Setup

Here's the 1 month expected move with tomorrow's close highlighted, via Options AI technology:

And here's how the stock's expected move over the next month compares to some direct and indirect peers in sports gambling:

What's interesting is DKNG options expect stock moves almost inline with PENN over the next month. That's despite the fact that PENN has already reported their earnings and DKNG has not. The other interesting thing is DKNG is only pricing in 8% of its 19% monthly expected move on the event itself. Typically, during this earnings season, you'd see more than half of the monthly move priced for the event.

Covid vs Sports

The options market is essentially saying that volatility isn't just a one day event in these names. And the headlines of what sports will play and what sports will shut down this Fall and Winter remain the bigger driver of volatility.

Retail Trading Interest

Add in a little mania in some of these names from the sports gambling crowd that has suddenly discovered day-trading (and upside calls) and you see options skew like this:

Notice the difference in probability assigned by the options market to the same move higher as lower on August 21st (30% for a $4 move higher and 20% for a $4 move lower). That doesn't mean that DKNG is more likely to go higher than lower, no one knows that. It does mean that traders are chasing upside calls at a rate much higher than downside puts. That is a theme across a lot of these popular story stocks right now and is heavily retail driven.

From a trading perspective that simply means the options market is charging more for a move higher than lower. To take advantage of that reverse skew* you want to be selling upside calls versus buying closer to the money options.

*(reverse of normal skew in equity options where downside puts are typically more expensive than upside calls)

For instance:

The +36/-40 call spread in August, (about $1.35) is trading for just slightly more than buying the 40 call outright ($1.15):

That's not to say the stock is going higher, it is to say that if you want to buy upside, the options market is encouraging call spreads over calls, which would result in a much lower breakeven in the stock and higher probability of profit.

Previously:

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