DraftKings Stock Pullback Could Give Way To Upside

Posted on: February 26, 2024, 02:35h. 

Last updated on: February 26, 2024, 02:43h.

Down 9.56% over the past week, DraftKings (NASDAQ: DKNG) stock could be in the midst of a pullback that some investors have been eagerly awaiting.

Employees at DraftKings headquarters in Boston. The stock is retreating from recent highs, but that could represent a buying opportunity, according to experts. (Image: CNBC)

Even with the recent retrenchment, shares of the online sportsbook operator are higher by 14.35% year to date, and that’s after the stock nearly tripled last year. While the decline by DraftKings stock has taken it 11.64% below its 52-week high — exceeding the definition of a correction — none of the major moving averages have been violated and it’s far from a bear market. Moving averages provide traders with important clues about a stock’s support and resistance areas.

Market participants have sold DraftKings in recent days, perhaps owing to concerns that the stock is richly valued and to some complexities tied to the $750 million cash/stock deal for online lottery provider Jackpocket. However, JMP Securities analyst Jordan Bender said in a recent note to clients that DraftKings merits a high multiple on par with previous storied growth stocks.

Recipe for More DraftKings Stock Gains

Valuation alone isn’t a reason to buy or sell a stock, and the current environment favors growth equities, perhaps auguring well for more DraftKings gains. Additionally, the options market may be revealing positive hints about the near-term outlook for the gaming stock.

Prior to the company’s fourth-quarter earnings report, five of the biggest open interest (OI) positions on DKNG were puts,” according to Schaeffer’s Investment Research. “Plus, a significant volume of overhead calls at the 45-strike and above expired on Friday, removing potential options-related resistance. Meanwhile, April’s implied volatility (IV) plunged 16%, a level that is on par with 63-day historical volatility (HV).”

As volatility declines, so do the premiums traders pay for options contracts.

Due to its status as a growth stock with a penchant for occasionally significant, event-driven moves, DraftKings is often a favored target of options traders. As such, the options market can provide valuable insight into what’s in store for shares of the online sportsbook operator over the near term.

Short Covering Could Also Help DraftKings Stock

Another potential catalyst for DraftKings’ stock is that bearish traders are still engaged with the shares – a dangerous proposition should upside resume over the near term.

It’s also worth noting that shorts are still in covering mode, and that the 19.81 million shares sold short account for nearly 5% of the stock’s available float. Our call option has a leverage ratio of 6.5, and will double in a 15.4% move higher in the underlying security,” concludes Schaeffer’s.

Said another way, if DraftKings trades higher, short sellers may be forced to buy the shares they borrowed to cover bearish bets, thus fueling a potential rally in the name.

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