In the market, perhaps the most common mantra you’ll come across is, buy low and sell high. However, that’s easier said than done. Sure, you can filter for securities that have suffered red ink. You can even take it a step further by referencing certain methodologies within technical analysis, such as focusing only on stocks that have triggered oversold indicators.
Here’s the problem, though: anyone can adopt the simple contrarian approach of buying deflated securities. If this approach were even mildly successful, it would spark copycat movements and deliver millions of successful day trading aficionados. However, reality tells a far different story.
Of course, extreme volatile events can be useful to the contrarian investor. Since they represent market movements that are multiple standard deviations from the norm, they could represent either a trend reversal or a discounted long-side opportunity. Obviously, though, it’s critical to have a methodology that provides some quantifiable assessment of the situation at hand.
To address this concern, I developed a probabilistic quant model — which I call the Probability Gambit (PG) — to assess the statistical viability of directional stock movements based on historical performance clusters. In this manner, I leverage empirical data rather than rely on discretionary or arbitrary heuristics.
Without getting too deep into the weeds, I use a distinct (if not outright unique) analytical framework to find either realistic options strategies or derivatives that are favorably mispriced for the benefit of the speculator. So, let’s get right into it with potentially compelling bounce-back candidates.
Fiverr (FVRR)
Online freelance marketplace Fiverr (FVRR) has been all over the map. A few days ago, the company posted revenue of $103.7 million, up 13.3% on a year-over-year basis while also beating Wall Street’s consensus target. Further, management noted that next quarter’s revenue guidance — which landed at $106 million at the midpoint — would hit 3.6% above analysts' expectations.
However, the market overall didn’t respond well to FVRR stock, perhaps due to rising concerns regarding economic stability. For the business week ending Friday, FVRR gave up around 24.5% of equity value. Still, the extreme red ink could represent an opportunity.
| Wk 0 | Wk 1 | Wk 2 | Wk 3 | Wk 4 | Wk 5 | Wk 6 | Wk 7 | Wk 8 | |
| Baseline Median Pos | $25.70 | $27.42 | $27.58 | $28.22 | $28.94 | $29.65 | $30.44 | $30.38 | $30.23 |
| Baseline Median Neg | $25.70 | $24.37 | $23.67 | $23.25 | $22.90 | $22.18 | $22.38 | $21.59 | $21.12 |
| PG Median Pos | $25.70 | $26.83 | $26.62 | $27.17 | $26.52 | $26.71 | $29.31 | $28.40 | $28.09 |
| PG Median Neg | $25.70 | $25.70 | $25.06 | $24.51 | $25.70 | $25.70 | $25.47 | $25.01 | $24.75 |
| Long Odds (Baseline) | 46.46% | 52.03% | 51.19% | 48.64% | 50.51% | 47.95% | 50.52% | 50.00% | |
| Long Odds (PG) | 100.00% | 66.67% | 33.33% | 100.00% | 100.00% | 66.67% | 66.67% | 33.33% | |
| Sample Size (Baseline) | 297 | 296 | 295 | 294 | 293 | 292 | 291 | 290 | |
| Sample Size (PG) | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 |
Generally speaking, FVRR stock has a slightly negative bias. On any given week, the chances that a position entered at the beginning would be profitable is only 46.46%. Over an eight-week period, this stat “improves” to 50%, which really doesn’t provide much of an information edge.
However, in the three times when FVRR stock suffered a weekly loss of 20% or greater, every occurrence saw investors buy the dip in the following week. So, it wouldn’t be surprising to see a pop soon.
To be fair, a sample size of three weeks is very prone to distortion. Still, when modeling for weekly losses landing between 10% and 20%, investors also demonstrate a tendency of buying the dips — and this assessment is based on a sample size of 32.
Realistically, though, the upside target for FVRR stock based on its historical trends under similar circumstances isn’t particularly robust. Therefore, using the information provided by Barchart Premier, the most aggressive options strategy that still makes rational sense would arguably be the 24/27 bull call spread for the March 21 expiration date.
Twilio (TWLO)
Another bounce-back candidate that’s been driving wildly on the road is Twilio (TWLO). Although it’s a technically strong player and features fundamental relevance for artificial intelligence, Twilio unfortunately posted a disappointing outlook, with a top-line projection falling just shy of the consensus estimate of $1.14 billion. That sent TWLO stock tumbling. Last week, it ended up losing 9.8%.
To be clear, TWLO stock is a difficult animal to assess. Generally speaking, the equity features a neutral to slightly upward bias. A position entered at the beginning of the week has a 53.12% chance of rising by the end of it. Over an eight-week period, the long odds dip to 49.84%.
| Wk 0 | Wk 1 | Wk 2 | Wk 3 | Wk 4 | Wk 5 | Wk 6 | Wk 7 | Wk 8 | |
| Baseline Median Pos | $114.31 | $119.93 | $122.52 | $123.97 | $125.09 | $126.50 | $129.04 | $132.04 | $132.64 |
| Baseline Median Neg | $114.31 | $108.72 | $108.16 | $105.34 | $104.49 | $102.43 | $100.12 | $99.98 | $97.87 |
| PG Median Pos | $114.31 | $120.24 | $123.13 | $122.85 | $124.13 | $126.84 | $136.17 | $135.03 | $133.59 |
| PG Median Neg | $114.31 | $112.03 | $111.34 | $108.29 | $108.89 | $104.14 | $105.19 | $105.92 | $103.70 |
| Long Odds (Baseline) | 53.12% | 48.59% | 50.31% | 50.79% | 50.95% | 50.79% | 48.09% | 49.84% | |
| Long Odds (PG) | 70.27% | 51.35% | 48.65% | 59.46% | 56.76% | 45.95% | 43.24% | 48.65% | |
| Sample Size (Baseline) | 320 | 319 | 318 | 317 | 316 | 315 | 314 | 313 | |
| Sample Size (PG) | 37 | 37 | 37 | 37 | 37 | 37 | 37 | 37 |
However, what’s really intriguing is that when TWLO stock loses between 5% and 10%, investors gravitate toward the dip early on. After a week of high volatility, the subsequent week sees long odds pop to 70.27%. That’s with a sample size of 37 weeks, adding to the potential credibility of the outlook.
It’s possible that TWLO stock could jump to $120.24 if the positive scenario materializes. Should you want to swing for the fences, you may consider the ultra-aggressive 117/120 bull call spread for the options chain expiring this Friday. Because of the high payout that this call spread offers, it’s possible that they’re favorably mispriced.
The RealReal (REAL)
If you happen to have some “stupid” money lying around and you want to put to use — rather than say gamble it on scratchers or something — you might consider betting on The RealReal (REAL). The secondhand luxury marketplace posted fourth-quarter earnings results which saw guidance miss significantly. Also, the number of active buyers fell a bit short of the Street’s estimates.
Amid challenging economic circumstances, this is the kind of report you don’t want to disclose. As such, REAL stock ended up losing almost 20%.
As a rule of thumb, investors should avoid REAL stock. The reason? It clearly has a negative bias. Baseline probabilities for long-side traders over a one-week period is only 44.41%. Over an eight-week period, the long odds slip to 42.36%.
| Wk 0 | Wk 1 | Wk 2 | Wk 3 | Wk 4 | Wk 5 | Wk 6 | Wk 7 | Wk 8 | |
| Baseline Median Pos | $6.46 | $6.96 | $7.19 | $7.39 | $7.63 | $7.81 | $7.98 | $8.11 | $8.40 |
| Baseline Median Neg | $6.46 | $5.98 | $5.74 | $5.56 | $5.51 | $5.37 | $5.20 | $5.16 | $5.16 |
| PG Median Pos | $6.46 | $7.26 | $7.35 | $7.27 | $7.12 | $7.20 | $7.99 | $8.49 | $9.00 |
| PG Median Neg | $6.46 | $5.94 | $5.69 | $5.76 | $5.74 | $5.88 | $5.42 | $5.35 | $5.17 |
| Long Odds (Baseline) | 44.41% | 45.92% | 46.08% | 44.52% | 44.67% | 43.79% | 42.56% | 42.36% | |
| Long Odds (PG) | 53.85% | 56.41% | 66.67% | 61.54% | 58.97% | 51.28% | 48.72% | 48.72% | |
| Sample Size (Baseline) | 295 | 294 | 293 | 292 | 291 | 290 | 289 | 288 | |
| Sample Size (PG) | 39 | 39 | 39 | 39 | 39 | 39 | 39 | 39 |
However, extreme volatility tends to bring out the buyers (for whatever reason). At least temporarily, you may see a bullish recovery in REAL stock. Long odds for the third subsequent week following an extreme-fear event clock in at nearly 67%.
Even four weeks out — which aligns with the next available options chain of March 21 — the long odds are favorable at 61.54%. The main question mark is the upside price target. My simulation calls for $7.12 at the highest. Unfortunately, the only available bull call spread is the 5.00/7.50.
Still, it’s not impossible for REAL stock to get there. I’ll leave that decision up to you.
