Tuesday, options will hit the market for Draganfly (DPRO) . I love it when new contracts, especially in names I follow closely, make their debut in the market.
The first week will find thin volume and wide spreads, so there likely won't be a whole lot to look at initially, but as the market wakes up to the option of options, we should see volume come into play.
I do pay closer attention to smaller names as I often find a dislocation of price versus reality. That may sound strange, but when options first hit behind a stock there isn't a ton of historical data from which to base pricing. You see, the influence of options has never been present so for traders not familiar with the stock or the industry, they could tend to overbid on some contracts.
I tend to look for put sales first. I'm not sure if DPRO will open with $1 wide strikes or if it will go $2.50 and $5.00 strikes. I certainly hope it is not the latter as that won't really encourage much in the way of trade. Neither of the contracts will trade with much premium with the stock basically sitting right in the middle and needing a 33% move to reach either. If we do happen to get saddled with wide strikes, then I'll still look for an opportunity to play the options market, but I know my choices will be limited.
In terms of what strategy I'll pursue, it will likely be one of two things. The first will be a simple put sale. If I'm able to sell out-of-the-money puts at $3.00 or $2.50 for a somewhat decent premium that don't have to go too far out in the time, then I will definitely do that. I'm talking about December or January in terms of time.
The other approach would be a risk reversal, which entails the same put-selling strategy but using the premium received to buy a call. This might be a cheap way to get upside above $5 with the only downside risk being a buy under $2.50. Obviously, if the stock stayed in between the two strikes, this would simple expire harmless, offering no profit or loss.
If it isn't clear already, I'd much prefer to see $1 strikes. This will open up many more plays like collars, ratio spreads, and directional spreads. It should allow for greater speculation and momentum squeezes as well. When small drone names get moving, they can move quickly. Put options behind those same names and they can explode.
One thing not being considered is how options could soften the blow of Draganfly's Reg A offering it did earlier this year. Some shares have come to market in September while the rest will hit in December. This includes both shares with a $2.35 cost basis and warrants that can be exercised at $3.55. Now, those holders may have the opportunity to hedge off that position.
Given that those shares are locked, the holders can't go and eliminate virtually all their risk by buying something like a $10 put. That would be viewed as a constructive sale, but they could absolutely buy a position that still holds some risk such as a $2.50 put, $3.00 put or even $4.00 put, if available.
They could also consider December bearish call spreads or put spreads to partially hedge their position. Anything involving a call sale does open the risk to being called away early without being able to deliver or cover with locked shares, so I don't expect that to be as common.
I doubt we'll see this benefit discussed with the release of options, but I see it as a big plus. Options should reduce any pressure from the December unlock of the Reg A shares and warrants.
Another thing that could help is some good news in the form of new contracts or contract renewals. Together, they could create the spark DPRO needs to fill the post-uplist gap sitting on the chart.
The stock has been getting rejected from the $4.00 to $4.20 level, but once the shares manage to close above $4.20 I believe we'll move back into the $5s quickly.
