Smart Money Is In Fierce Tug-Of-War Ahead Of Robinhood Earnings - Robinhood Markets (NASDAQ:HOOD)

Financial technology powerhouse Robinhood Markets Inc HOOD easily ranks among the top innovators, providing a convenient mechanism for the democratization of investing.

Naturally, Robinhood stock has absorbed significant interest, gaining about 350% over the past one-year period. Still, such astounding performances raise concerns about overvaluation — concerns that the smart money appears to be digesting.

In terms of the headline statistic, the biggest unusual options trade by far earlier today in terms of dollar value went to $50 call options featuring bullish sentiment. However, the total number of trades leaned bearishly, with 50% of investors opening trades with bearish expectations while 45% opened with bullish expectations.

Unfortunately, it's not such a cut-and-dry case. Late last week, the sentiment fissure was much more pronounced, with big-money traders splitting their funds 55% in the bearish direction and 34% in the bullish, with the remainder directed as neutral transactions.

Put another way, the most prudent approach may be to consider Robinhood stock as a volatility trade. However, there could be an argument for a directionally bullish wager considering the relative uptick in bullish transactions among the big-money traders.

Yes, on the surface, Robinhood’s stock seems wildly overvalued. For example, the equity currently trades at 20.49-times trailing-12-month sales. Around this point last year, this metric sat at only 9.62 times. However, analysts overall anticipate that Robinhood will generate $3.37 billion in revenue for fiscal 2025. Based on this projection, the forward sales multiple declines to a much more reasonable 14.2 times.

Moreover, investors must appreciate Robinhood's ambitious objectives. As Barclays analyst Benjamin Budish noted last year, Robinhood's potential future growth enjoys several fresh catalysts: new products (like futures and credit cards), geographic expansion (particularly in the U.K.) and new channels, particularly in the cryptocurrency realm.

Framing HOOD Stock as a ‘FOMO' Trade

Perhaps the biggest takeaway regarding Robinhood stock from a trading perspective is that it responds aggressively to FOMO or the fear of missing out. In other words, this is a security that thrives on positive energy. However, speculators should also realize the opposite is also true: the stock price tends to tank on negative energy.

From a purely stochastic or temporal view, a position entered at the beginning of the week has around a 52.5% chance of rising by the end of it. The long odds continue to be above a coin toss in two and three-week intervals. However, by the end of the fourth week, the long odds dip slightly to 49.17%.

On a dynamic basis (accounting for certain conditions), the probabilities fluctuate noticeably. For example, last week, the stock gained 15.2%. Historically, whenever Robinhood gained between 10% and 20% during a one-week period, the long odds for the subsequent week spiked to around 73%. By the end of the fourth subsequent week following this extreme-greed event, the long odds are still favorable at 60%.

Interestingly, investors do not show a tendency of buying the dips in the company’s stock. Following a weekly loss between 10% and 20%, the chances that Robinhood will rise in the subsequent week lands at only 35.3%. Over the course of four weeks, long odds are even worse at 29.4%.

That's not to say that these statistical tendencies guarantee a move in one direction or another because they absolutely do not. However, investors should realize that strength in Robinhood stock continues to bolster more strength. At the same time, severe corrections tend to scare off traders, adding to the high-stakes atmosphere.

Plotting an Effective Options Strategy for Robinhood

Arguably, the most sensible options-based approach for the company is to treat it as a volatility trade. One week after the aforementioned extreme-greed event (which coincides with the options chain expiring Feb. 14), the median return under the positive scenario is 3.07% while the median loss under the negative scenario is 4.93%. Based on last Friday's close as the anchor, that would target a high of $57.57 and a low of $53.11.

Complicating matters, though, is the wildly high implied volatility (IV) of approximately 168%. Essentially, IV represents the market's anticipation of mobility in the target asset. Using reverse engineering which accounts for the time decay of options, market makers are anticipating a move of $8.27 in either direction; therefore, roughly $62.48 at the high or $45.94 at the low.

One approach may involve splitting the difference between the two data sets, thus targeting $60 at the high and around $50 at the low. For this trade, one could consider the 50P | 52P || 58C | 60C long iron condor for the options chain expiring this Friday.

The above transaction combines the 50/52 bear put spread and the 58/60 bull call spread, with the maximum payout triggered if Robinhood stock rises to $60 or falls to $50. At time of writing, a trader risks $140 for the chance to earn a maximum of $60.

Of course, the long iron condor features a less-attractive reward profile because the trader is essentially paying two premiums. On the other hand, for traders who believe in the bullish statistical tendency, the framework becomes quite alluring.

As an example, long speculators may consider the 57/60 bull call spread for the options chain expiring March 7. This transaction requires a net debit of $99 for the chance to earn a maximum reward of $201. That's a payout of 203% compared to the long iron condor's 43% payout.

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