Unusual Options Data Points to a Hidden Opportunity for Wolfspeed (WOLF) Bulls

It’s difficult to view Wolfspeed (WOLF) with anything but skepticism. Billed as a silicon carbide technology and production company, Wolfspeed is fundamentally relevant, providing solutions for energy consumption. Thanks to the burgeoning market for electric vehicles, the business should theoretically enjoy an ascending trend. Unfortunately, quite the opposite is true for WOLF stock.

Since the start of the year, shares slipped almost 84%, a truly terrifying figure. To understand the scale of devastation, WOLF stock previously traded hands at well over $100 per share back in September 2022. But by November of that year, the air was quickly leaking out of the energy tech enterprise. As of this moment, Wall Street analysts rate Wolfspeed as a consensus Hold.

Last week was particularly devastating, with WOLF stock losing more than 14%. Alarmingly, over the trailing five years, WOLF has suffered one-week losses of 10% or worse 34 times. Naturally, this framework makes arguably most investors skittish about the underlying entity. To be sure, while last Friday was a positive session, WOLF represented one of the lowlights of Barchart’s unusual options volume screener.

On Friday, total volume reached only 12,166 contracts versus an open interest reading of 580,578 contracts. This figure fell 46.57% against the trailing one-month average metric. Call volume hit 8,055 contracts while put volume landed at 4,111 contracts, yielding a put/call volume ratio of 0.51.

At first glance, this lowly ratio suggests bullish sentiment: more calls are being placed than puts. However, options flow data — which filters exclusively for big block transactions likely placed by institutional investors — demonstrated a slightly bearish sentiment. Predominantly, the big dogs sold short $7 calls expiring at various dates.

This backdrop doesn’t seem enticing. However, the speculative bulls may not want to give up just yet.

Running the Hard Numbers on WOLF Stock

Before diving into any options trade, it’s useful to consider the baseline probabilities of the transaction being profitable. For WOLF stock, it features a slightly negative bias based on weekly performance statistics (that is, the percentage difference between Monday’s opening price and Friday’s close).

Out of 261 weeks, 128 represented positive weeks, 132 were negative weeks and one week came in perfectly flat (0% return). Basically, that’s a 49% success ratio — slightly worse than a coin toss.

However, that doesn’t rule out a speculative bullish position necessarily because we’re not interested in baseline probabilities. Instead, we’re seeking conditional probabilities; that is, what is the likelihood given a 10% weekly loss or worse that the following week will be positive? To answer this question, we must deploy a Bayesian inference (formula below).

P(A∣B) = P(A∩B) ÷ P(B), where:

• P(A∣B) means the probability of A happening, given B has already occurred.
• P(A∩B) is the probability that both A and B happen at the same time.
• P(B) is the probability that event B happens.

Of the 34 times that WOLF stock incurred a 10% loss or worse, the following 19 weeks saw either a flat or positive return, yielding a success ratio of just under 56%. What’s also notable is that during these 19 positive-response weeks, the average return clocks in at 9.88%.

Now, the probability of success isn’t exactly earthshattering, let’s be real here. However, 56% odds are significantly better than 49%, meaning that the baseline probabilities may be somewhat deceptive.

Scalping a Quick Payout This Week

Now that we’ve calculated our probability matrix, it’s time to take this information and see if we can’t profitably exploit it. One idea to consider is the 6/8 bull call spread that expires on Dec. 27 (this Friday). Here, the trader would buy the $6 call and simultaneously sell the $8 call, with the premium received from the short call partially offsetting the debit paid for the long call.

Compellingly, the breakeven price for this transaction landed at $7.05 at time of writing (basically in line with Friday’s close). What might turn some traders off is that the probability of profit (based on delta calculations) sits at 49.6%. However, as we covered earlier, the conditional probability is around 56%. With that knowledge, there’s an incentive to at least consider this trade.

Now, it must be said that while the payout for this bull call spread stands at 90.48%, this full reward is unlikely to materialize. WOLF stock would need to hit $8 or above, which is roughly 14% above Friday’s close. However, should a bullish swing materialize, the average return is almost 10%. That means WOLF could potentially hit $7.74.

If so, the payout would come out to roughly 66%. That’s not bad at all for one week’s worth of speculation.