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There have been several regulation changes throughout history that have set the stage for businesses to thrive. Getting in early, before the company has already started to flourish, will benefit investors.
Some of the more obvious examples might include changes to sales tax, tariffs or trade policies, general data protection regulations (GDPR), or outright law changes, such as allowing the legal sale of cannabis.
When law prevents a business from thriving, then voters change the law, it opens the opportunity for massive growth.
Today we have a company that is in a perfect position for long-term growth, but is currently being stifled by both the coronavirus and regulations, but those are soon likely to both change.
How long COVID-19 last is anyone’s guess, but this is one company we don’t want to see slip away.
The fact is companies continue to grow over time. This something that should be quite obvious to anyone with even a casual understanding of how the stock markets work. Stock prices go up over time to match the company’s growth. Some companies just grow faster than others, resulting in accelerated stock gains.
One of the top things that could accelerate a company’s growth is the right product at the right time, along with a regulation change that would instantly cause the product to explode.
Today we may have a company that is heading right down that path.
On May 14, 2018, the United States Supreme Court found the Professional and Amateur Sports Protection Act (PASPA), the federal law prohibiting states from authorizing sports betting, to be unconstitutional. It is now up to individual states to decide if they want to authorize and regulate sports betting in their state. Congress can also take action on the authorization and regulation of sports betting but has so far left it up to individual states.
One of the top players in the space that we have been keeping a close eye on over the last several months is DraftKings (DKNG), an American daily fantasy sports contest and sports betting operator. The company allows users to enter daily and weekly fantasy sports-related contests and win money based on individual player performances in major American sports (MLB, the NHL, the NFL, the NBA, and the PGA), Premier League and UEFA Champions League soccer, NASCAR auto racing, Canadian Football League, the XFL, mixed martial arts (MMA) and Tennis.
In August 2018, DraftKings launched DraftKings Sportsbook in New Jersey, becoming the state’s first legal mobile sports betting operator. Since then, DraftKings has opened mobile sports betting operations in Indiana, Pennsylvania, West Virginia, and New Hampshire.
Retail sports betting is available in Iowa, Mississippi, and New York. DraftKings Sportsbook mobile and retail sports betting products allow bettors in each state to engage in betting for most major US and international sports.
In total, DraftKings currently operates in 20 states that allow sports gambling in some form or another.
This means that there are still 30 states where they don’t operate.
We particularly have our eye on the California sports betting bill on the November ballot. If it passes, the California sports betting market would undoubtedly become the country’s biggest and fast.
Chris Grove of the research firm Eilers and Krejcik Gaming said that the market could be worth $2.5 billion per year in California alone.
There is no guarantee that the bill will pass. It needs a two-thirds supermajority to pass, but they are continually moving closer and closer in that direction.
If DraftKing’s were able to land California, the stock would go on a tear, but even if it doesn’t, the opportunities ahead of them look fantastic. They will continue to grow in the states that they are currently operating, but once they start acquiring more and more states, the possibilities become quite large.
Even in the pandemic with limited sports, people want this product. New Jersey’s year-over-year sports betting in June was higher in 2020 than it was in 2019.
In addition, earlier this week, Michael Jordan took an equity stake in DraftKings in exchange for providing guidance and strategic advice to the company’s board of directors. He will also join the e-sports and gambling company as a special adviser.
Although the possibilities are quite favorable over the long term, there are some risks associated with this trade. Most sports are on hiatus for starters due to COVID-19 and the challenges that come along with the pandemic. COVID-19 cases are continuing to decline, and there is optimism on the horizon. Plus, 19 vaccine candidates are currently in stage II or stage III trials.
Even though limited sports are happening at the moment, the stock has been holding its own. This is because markets are forward-thinking, and everyone knows at some point, sports will happen again.
The NFL is the most popular sport in the US. If the NFL season kicks off or gets put on hold due to increased COVID-19 cases, it will affect DraftKings stock price one way or another.
Currently, all this downtime is driving pent up demand for sports and all the activities that go along with sports. This will play right into DraftKings hand when sports do finally come back.
It has been some time since we have seen a significant down day in the markets, but yesterday was the first one since June, especially in the tech sector.
Although buying on pullbacks can undoubtedly be scary, it’s a strategy that consistently pays off in the long run. There’s no doubt the stock could pull back into the lower $30s over the short term. But we would rather open the trade now verses risking a run up in the stock.
The fact is we don’t know for sure when sports will come back, but we know for sure that at some point they will. When they do, DraftKings will be in a perfect position to capitalize.
A risk reversal strategy will work perfectly for a trade with a lot of potential, but also a lot of uncertainty.
Here I want to sell the DKNG January 2022 30-strike price puts and then buy the January 2022 50-strike price calls, and for this, I will receive a credit of $0.50.
If the stock finished below $30 in January 2022, which is our worst case scenario, we would be forced to buy the stock at that price, but because we received a $0.50 credit when we executed this trade, our adjusted cost basis would be $29.50. That is 16% lower than where the stock is right now.
If the stock finished between $30 and $50, we would keep the $0.50 as profit, and we would have no position in the stock.
If the stock finished above $50, we would be able to buy the stock for that price and retain it or sell it in the open market at the current market price, but we would also keep the $0.50 credit received.
Collect at least $0.05 to enter this trade.
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