Perfect Pairing: The Perfect Pairing for a Winning Bet

The company is benefitting from the surge in betting during the tournaments, but what about the future?

As March Madness captivates basketball fans across the nation, the resulting surge in sports betting isn’t going unnoticed. Active investors are eying the gaming industry, including DraftKings (DKNG), a standout company that offers opportunity but poses challenges.

Let’s look at the big picture: Americans are expected to place $3.1 billion in legal wagers on the men’s and women’s NCAA basketball tournaments, reflecting a 14% increase from the previous year. As a leading player in online sports betting, DraftKings is well-positioned to benefit from the growing sports betting market.

March Madness has long been a focal point for sports betting enthusiasts, and this year is no exception. With the NCAA tournaments attracting millions of fans, the excitement surrounding the games is mirrored in the surge of betting.

This growth in legal sports wagering is becoming increasingly significant as more states continue to legalize it. For DraftKings, this is a golden opportunity to capitalize on the uptick in betting volume, further solidifying its position in the market.

Navigating the market surge

As deadline approached for this issue of Luckbox, DraftKings’ stock was trading at $38.95, reflecting a 3.87% decline from the previous day. But despite the dip, the company’s stock remains a strong contender in the expanding sports betting market and has strong potential for growth.

Its stock has been relatively volatile, fluctuating because of market conditions, especially during high-activity periods like March Madness. While the share price is down 27.35% from its 52-week high of $53.61, the company’s strong brand and leading position in the U.S. sports betting market combine to position it well for growth.

DraftKings CEO on March Madness

DraftKings CEO Jason Robins recently commented on March Madness, stating, "It’s a great time for fans and a really important time for us." He says the event not only provides exciting entertainment but also represents a key opportunity for the company to expand its reach and drive engagement.

Robins emphasizes how significant the tournament is for DraftKings—not just as a time for fans to engage with sports but as a vital period for the company’s financial performance. The company expects a boost in user acquisition and betting volume, solidifying its role as a leader in the sports betting industry.

Volatility and implied volatility (IV)

DraftKings has an Implied Volatility Rank (IVR) of 30, indicating a somewhat high level of volatility in its stock options. That creates opportunities for options traders to capitalize on potential price movements in the stock.

This level of volatility is appealing because the price swings offer the chance to profit from the stock’s movement without needing to buy or sell the underlying stock outright.

Taking a long position: Selling out-of-the-money puts

I am looking to take a long position on DraftKings by selling out-of-the-money puts, specifically targeting the 30 delta puts in the May 16 expiration cycle. These options offer a 70% probability of profit, making them an appealing choice for an options trade with a favorable risk-to-reward profile.

By selling out-of-the-money puts, I aim to profit from DraftKings’ potential upward movement without committing to the stock right away. The strategy offers a solid probability of profit while enabling me to benefit from the stock's growth—all while managing risk.

Risk management strategy

My plan is to set a stop loss at 2x the credit I receive upon entering the position to manage potential losses effectively. This risk management strategy ensures that I protect my capital while still positioning myself for substantial profits if DraftKings’ stock remains stable or increases in price.

By managing my risk and limiting potential losses, I can remain comfortable with the trade while taking advantage of DraftKings' potential upside.

Industry challenges amid growth

Companies like DraftKings face inherent volatility, with other stocks in the sector, like MGM Resorts, also experience price fluctuations. DraftKings and its competitors are navigating a changing regulatory landscape, as seen with investigations into Robinhood’s new prediction markets hub.

Despite the growth potential in the sports betting industry, challenges like market volatility and regulatory issues present risks for companies like DraftKings. The ongoing scrutiny by regulators in various states and the increasing number of competitors in the space create a complex environment.

Looking ahead: The future of sports betting stocks

The sports betting market is expected to continue expanding, providing ample growth opportunities for companies like DraftKings. While the company has strong growth potential, it must overcome competition and regulatory hurdles to maintain its position as a market leader.

The future of sports betting stocks remains promising, especially with more states legalizing betting and new markets emerging. However, the industry will need to evolve to address the competitive pressures and regulatory scrutiny that may affect growth in the long term.

DraftKings stands to benefit from the boom in betting activity during March Madness, a crucial moment for sports betting companies. For options traders, the current market conditions offer the potential for profitable trades. I am positioning myself to take advantage of the company’s growth potential, all while navigating the volatility and challenges in the industry.

Errol Coleman appears on the tastylive network shows Today’s Assignment and Trades on the Go.