** Short sellers in DraftKings DKNG.O have been covering their positions, reducing the risk of a sharp short squeeze, S3 Research

** The digital sports gaming company's shares spiked as much as 8.3% on Monday after a Wall Street Journal report said U.S. lawmakers had introduced a bipartisan bill banning sports bets on prediction markets Kalshi and Polymarket

** The legislation would remove a central bear thesis against DraftKings, pushing the bearish investors to trim their positions, S3 Research says in a note

** DraftKings short sellers were already covering before Monday's catalyst hit; DKNG short interest peaked at 38.5 million shares in early February, then fell nearly 6 million shares in under six weeks - S3 Research

** The report could further accelerate the short-covering trend that has been underway since the start of 2026 but the remaining short position is unlikely to produce "an explosive, self-reinforcing squeeze" - S3 Research

** DKNG forecast 2026 revenue below estimates last month

** Stock down ~40% since the start of the year, down nearly 70% from its 2021 all-time high of $74.38

(Reporting by Medha Singh)

((medha.singh@thomsonreuters.com))