2 Trades to Consider Following SoundHound AI’s (SOUN) Dramatic Implosion

While the technology ecosystem — particularly the segments dealing with artificial intelligence — has undeniably delivered groundbreaking innovations, it has also sparked wild volatility in the market. Case in point is voice AI technology specialist SoundHound AI (SOUN). As a provider of voice assistants and conversational AI, the company has imbued machine learning with a sense of practicality. Not surprisingly, SOUN stock has gained almost 175% in the past one year.

Still, investors can’t take the good without the bad. On Friday, SOUN stock gave up over 28% of equity value. For the week, that brought the loss to just under 30%. What sparked the selloff? It wasn’t really anything that the company did per say. Rather, regulatory filings revealed that Nvidia (NVDA) sold its stake in SoundHound. Unfortunately, the market viewed the move as a serious loss of confidence.

To be sure, the red ink potentially offers a huge discount for speculators waiting on the sidelines. SoundHound has been a leader in voice AI technology, enabling organic conversations between humans and devices. Such an innovation brings a wide range of relevancies to the table, from the automotive sector to the restaurant industry to financial services. On the surface, SOUN stock appears to be a solid pickup.

However, it’s important to consider the data before making significant moves. It’s here where intelligence nuance rather than gut reactions should play the role of the compass.

Unusual Options Activity Points to a Cautious Take

Given the severe loss of market value on Friday, it’s no shocker that SOUN stock represented one of the securities featured on Barchart’s unusual options screener. This useful interface reveals where the smart money may be directing their funds.

Following Friday’s closing bell, total options volume for SOUN stock hit 558,925 contracts against an open interest reading of 829,325 contracts. Against the trailing one-month average metric, Friday’s volume was up 235.02%. Further, call volume was 336,347 contracts versus put volume of 222,578, yielding a put/call ratio of 0.66.

At first glance, this ratio might appear favorable — more traders are apparently buying calls, which give them the right but not the obligation to buy the underlying security at the listed strike price. However, options flow — which focuses exclusively on big block transactions likely placed by institutional investors — reveals a different story.

Overall, net trade sentiment fell to $744,500 below parity, thus favoring the bears. Gross total dollar value of bearish transactions reached almost $1.8 million below parity, while bullish transactions landed at only $1.04 million. Therefore, the high volume of calls could be attributed to sold options, which have neutral to bearish implications.

Probability Matrix Favors a Nuanced Approach

One factor to keep in mind when assessing SOUN stock is its natural tendencies or cadence. Since making its public market debut in 2022, SOUN carries a neutral to negative bias. Viewing pricing data from a purely stochastic or temporal framework, a position entered at the beginning of the week has a 49% chance of rising by the end of it. The long odds slip slightly to 48% over a four-week basis.

However, it’s important not to analyze data for its own sake but rather filter for the data that are most relevant. Consider a musical composition. For the piece to work, all the musicians must play in the same key and tempo. In a similar fashion, pricing data must harmonize with the current cycle of the market or asset in question.

In SOUN’s case, the security dropped 30.25% last week. One-week losses of 30% or more are quite rare, happening six times since 2022. With this in mind, the long odds don’t become truly favorable to the bullish speculator until three weeks after the extreme-fear event. That would coincide with the options chain expiring March 7.

For the other weeks up to the options chain expiring March 14, traders may be better off considering a volatility play.

Two Trading Ideas to Consider

For those willing to take a risk, there are two trades to consider. The first one is immediate for the options chain expiring this Friday (Feb. 21). With long odds dipping to 33.33% following an extreme-fear event, it’s difficult to be bullish. So, paying the double premium associated with a long iron condor may make sense.

Specifically, I’m looking at the 10P | 10.50P || 11.50C | 12C long iron condor, which is the combination of the 10/10.50 bear put spread and the 11.50/12 bull call spread. This move isn’t particularly exciting, putting at risk $37 for the chance to earn $13. However, the other condors seem unreasonable based on likelihood of success.

For the second trade, I’m looking at a bull call spread for the options chain expiring March 7. The reason is that three weeks out from an extreme-fear event, the long odds rise to 66.67%. Specifically, the 10/12 bull call spread seems tempting. This trade risks $88 for the chance to earn $112, or a payout of 127.27%.