While matchmaking app Bumble (BMBL) may be in the business of love, it’s finding that in the market, Cupid is swiping left. Last week, BMBL stock gave up nearly 39% of equity value following an utterly disappointing earnings disclosure. Though circumstances look awful, there’s a small chance that BMBL could be due for a temporary rebound.
To be clear, any notion of potential bullishness is simply not apparent to the naked or even augmented eye. Frankly, the company’s fourth-quarter results were weak. Its core business — the Bumble app — suffered a 3.8% revenue decline. Further, the Badoo app and other revenue streams saw a decline of 6.8%. About the only positive was that Bumble narrowly met analysts’ EBITDA expectations for the quarter.
Still, the ugliness could not be denied. Even after the dust settled days after the disclosure, BMBL stock found itself listed on Barchart’s unusual options volume screener on Friday — and not really for good reasons. On the final day of last week, BMBL would lose almost 5% of value.
In terms of the derivatives market, total contracts hit 27,197 against an open interest reading of 105,864. Against the trailing one-month average metric, Friday’s volume soared nearly 236%. However, the breakdown of the options was quite noticeable: 7,634 calls versus 19,563 puts.
In fairness, reading the put/call ratio by itself can lead to erroneous interpretations. Therefore, it’s important to consider options flow, which focuses exclusively on big block transactions likely placed by institutional investors. Still, Friday’s net trade sentiment slightly favored the bears. Not surprisingly, most of last week saw sentiment tilt negatively.
Nevertheless, amid this volatile backdrop, intrepid speculators could possibly scalp some quick profits.
Rolling the Dice on BMBL Stock
As a rule of thumb, speculators attempting to trade BMBL stock should avoid doing so — unless the position is bearish. Empirically, the equity suffers from a negative bias. More often than not, you’ll end up losing money.
On any given week, a position entered at the beginning of it has a 41.43% chance of rising by the end of the period. Those are terrible odds. Over an eight-week frame, this baseline probability (for the long-side speculator) falls to 38.92%. Also, by the end of this period, the median return under the positive scenario is 8.9% while the median loss under the negative is 17.1%, thus demonstrating high volatility.
With all that said, I wanted to model for the extraordinary circumstance: what happens when BMBL stock suffers an extreme-fear event?
To simulate what could happen, I developed a framework called the Probability Gambit — essentially, this model creates a picture of an asset’s potential forward trajectory based on its own targeted empirical data. As it turns out, whenever BMBL stock suffers a loss of 20% or greater, the long odds eventually rise to 75%.
Before you rush in to buy BMLB stock, a warning must be issued: the sample size is only four weeks (entry points). However, what I discovered is that for volatile events involving weekly losses between 10% and 20%, the third-week long odds rise to nearly 56% with a sample size of nine. Again, we’re not talking about large datasets here. Still, the pattern is that traders tend to speculate on these extreme downswings.
Taking a Huge Risk
To be completely straightforward, BMBL stock should only be engaged with “stupid” money. There’s a high risk that the underlying dating app will stumble even more. At the same time, it’s also possible that the negativity is priced in.
For those willing to take the contrarian view, traders may consider the 5.00/6.00 bull call spread for the options chain expiring March 28. Due to the law of small numbers, BMBL stock will need to jump more than 15% from Friday’s close to reach the short strike price of $6. That’s a tall order.
Statistically, the best chance for such a rebound to materialize may be the third subsequent week following an extreme-fear event, coinciding with the March 14 expiration date. However, the extra two weeks provided by the March 28 call could provide you a small cushion. Still, as you might suspect, market makers see very little chance of BMBL recovering to this point and therefore, the call spread currently offers a max payout of over 122%.
Historically under similar conditions, BMBL stock has demonstrated significant upside momentum but for later weeks following the extreme-fear event. The thing is, in that later timeframe, the baseline tendency is for the security to gradually deflate. Therefore, speculators should be looking to profit earlier from a possible bounce back, not later.
