Traders and investors of DraftKings Inc. (DKNG) have kept the share prices range bound going into the company's fiscal second quarter earnings announcement. At first look, it seems that option traders are ready for a positive move, as the number of out-of-the-money call options is growing in the open interest. The unusual option activity could create a strong upward trend on the price action if DraftKings delivers a slam dunk earnings surprise.

The number of out-of-the-money call options is growing in the open interest for DKNG, and options premiums are unusually high right now. Trading volumes indicate that traders have been buying calls and selling puts in anticipation of a favorable earnings report. If these bets were to unwind, it could result in unexpected downward pressure on the share price of DraftKings.

It's difficult to correctly forecast the direction a stock will move after earnings. However, a juxtaposition between the stock's price action and option trading activity shows that, if DKNG delivers a negative report, the company's share price could fall, potentially falling below its 20-day moving average after the announcement. This is possible because options are priced for an upwards move, but unexpected poor news could catch traders by surprise and create a quick fall in share price.

Key Takeaways

  • Traders and investors have kept DraftKings' share price range bound headed into the earnings announcement.
  • The share price has been closing just above its 20-day moving average, having fallen from its recent all-time high.¬†
  • Call and put pricing is predicting a stronger move to the downside.
  • The volatility-based support and resistance levels allow for a nearly equal move in either direction.
  • This setup creates an opportunity for traders to profit from an unexpected earnings outcome.

By comparing the details of both stock price and option behavior, chart watchers can gain valuable insight, although it is imperative to understand the context in which this price behavior took place. The chart below illustrates the price action for the DKNG share price as of the market close on Wednesday, Aug. 4. This created the setup leading into the earnings announcement.

Earnings pricing for DraftKings Inc. (DKNG)

Current Trends

The one-month trend of DKNG stock has the share prices remaining in the middle of the volatility range, before rising above the 20-day moving average in the weeks before earnings. Over the past month, the lowest DKNG share price was around $42 in mid-July, and the highest share price was nearly $52 in early July. The price closed in the middle region depicted by the technical studies on this chart.

The studies are formed by 20-day Keltner Channel indicators. These depict price levels that represent a multiple of the Average True Range (ATR) for the stock. This array helps to highlight the way the price has risen above the 20-day moving average in the weeks before earnings. This price move from DKNG shares implies that investors expect a positive earnings result.

Tip

The Average True Range (ATR) has become a standard tool for depicting historical volatility over time. The typical average length of time used in its calculation is 10 to 20 time periods, which includes two to four weeks of trading on a daily chart.

In this context where the price trend for DKNG has risen to an average range, chart watchers can recognize that traders' and investors' confidence is growing going into earnings. It is notable that, in the weeks before earnings, DKNG's share price rose above the 20-day moving average from a below average range. That makes it important for chart watchers to determine whether the move is reflecting investors' expectations for a favorable earnings or not.

Option trading details can provide additional context to help chart watchers form an opinion about investor sentiment. Recently, option traders are favoring calls over puts by a decent margin. This volume normally suggests that traders are expecting a positive earnings report; however, it's necessary to understand the context of this volume.

Tip

The Keltner Channel indicator displays a set of semi-parallel lines based on a 20-day simple moving average and an upper and lower line. Because the upper lines are drawn by adding a multiple of ATR to the average and the lower lines are drawn by subtracting a multiple of ATR from the average price, then this channel indicator makes for an excellent visualization tool when charting historical volatility.

Trading Activity

Option traders recognize that DKNG shares have risen from a below average range to an average range and have priced their options as a bet that the stock will close within one of the two boxes depicted in the chart between today and Aug. 6, the Friday after the earnings report is released. The green-framed  box represents the pricing that call option sellers are offering. It implies a 38% chance that DraftKings shares will close inside this range by the end of the week if prices go higher. The red box represented the pricing for put options with a 32% probability if prices go lower on the announcement.

It's necessary to note that the open interest featured over 545,000 call options compared to over 387,000 puts, demonstrating the bias that option traders have, as nearly 60% of the options are calls. However, because the call box and put box are relatively equal in size, it tells us that the high percentage of call options being bought has only mildly pushed expectations higher.

Option pricing for DraftKings Inc. (DKNG)

The purple lines on the chart are generated by a 10-day Keltner Channel study set at four times the ATR. This measure tends to create highly correlated regions of strong support and resistance in the price action. These regions show up when the channel lines make a noticeable turn within the previous three months. 

The levels that the turns mark are annotated in the chart below. What is notable in this chart is that the call and put pricing are in such a close range with plenty of space to run in either direction. This suggests that option buyers don't have a strong conviction about how the company will report, even though call volume outweighs put volume. Although investors and option traders do not expect it, a surprising report would push prices dramatically higher or lower.

Volatility pattern for DraftKings Inc. (DKNG)

These support and resistance levels show a large range of support and resistance for prices. As a result, it is possible that any news, surprisingly bad or good, will catch investors by surprise and could generate an unusually large move. After the previous earnings announcement, DraftKings shares fell by 6.4% day after earnings and continued to fall for the next week. Investors may be expecting a different kind of move in the price after this announcement. With plenty of room in the volatility range, share prices could rise or fall more than expected.

Market Impact

DraftKings can hardly be considered a bellwether stock, so its earnings results likely won't have a direct impact on indexes. However, no matter what the report says, it will likely have a direct effect on stocks in the gambling industry. A positive report could lift other stocks in the industry such as Churchill Downs Incorporated (CHDN), Scientific Games Corporation (SGMS), or Rush Street Interactive, Inc. (RSI). It could also affect exchange traded funds (ETFs) such as the Defiance Next Gen SPAC Derived ETF (SPAK) or the VanEck Vectors Gaming ETF (BJK).