With the tech space still attempting to digest wide-ranging fears associated with the possible bubble in artificial intelligence, innovators in other fields have also struggled. In particular, Robinhood Markets Inc (NASDAQ:HOOD) has been stuck in a negatively tilted consolidation pattern since October. However, this behavioral cue may also be setting up a bullish reversal in HOOD stock.
One expert that apparently feels the same is Cathie Wood, who leads Ark Invest. Recently, the investment firm made several notable trades, perhaps most prominently increasing its stake in HOOD stock. Adding to the overall sentiment, Bank of America Securities analyst Craig Siegenthaler maintained a Buy rating on HOOD, though the expert did lower the price target down to $154 from the prior $166.
Still, even with the support, HOOD stock has struggled. In the past five sessions, the security lost more than 13% of value. As a result, the trailing month saw a return of less than 1%. Nevertheless, for quantitatively minded traders, Robinhood is arguably situated on ideal ground.
Predominantly, the financial analysis paradigm is dominated by single-path-domain thinking. In other words, people look to the HOOD stock price chart and obviously see one security's journey across time. Further, investors typically look toward analysts as a collective entity to collectively provide one consensus price target.
However, the stock market — and especially the options market — is a multiverse. We can't say absolutely in a metaphysical sense that it's a metaverse. However, from a mathematical and structural perspective, traders are effectively capitalizing the risk of alternate versions of reality coming true.
Sure, it may sound ridiculous at first glance but look at the HOOD stock options chain. What are all these calls and puts at various strike prices across multiple expiration dates? Yes, they are contractual rights to buy or sell the underlying stock but it's much more foundational.
They're literally pricing in the probability of alternate timelines. So, to trade the multiverse, you have to think in terms of the multiverse.
Distributional Analysis Opens A Deeper Understanding Of HOOD Stock
While talking about the multiverse conjures up images of time travel and other fantastical notions, the more mundane aspect is that the future is unknown. But rather than treat the future as some darkened pathway that simply needs illumination, it is instead a world of possibilities. However, as events unfold, certain branches of alternate realities collapse as their materialization becomes impossible.
No matter what, nobody knows what will happen next in the market. However, we can get a better idea of probabilities through distributional analysis. By discretizing and iterating HOOD stock's historical price stream into multiple rolling trials or sequences, we can identify the security's structural tendencies.
For example, one 10-week cycle isn't going to tell us much. But a hundred 10-week cycles stacked in a distribution will reveal structure. That's because one-off events will be effectively neutralized due to the volume of other data points. However, if multiple trials show pronounced activity at certain levels, that dynamic reveals the stock's kinetic tendencies.
Looking at HOOD stock, its 10-week trials since the company launched its initial public offering creates a forward 10-week distribution, which ranges approximately between $116 and $134 (assuming an anchor price of $116). Further, price clustering would likely occur at around $121.
While interesting, we're mostly concerned with the current quant signal, which is the 4-6-D sequence; that is, in the past 10 weeks, HOOD stock printed four up weeks and six down weeks, with an overall downward slope.
Following this specific setup, the forward 10-week distribution shifts conspicuously, ranging from $104 and $150. Moreover, primary price clustering would likely occur at around $122, while secondary clustering may coalesce around $133.
Given that the (primary) price clustering in the bimodal distribution of the aggregation and conditional expectation is about the same, we can infer that HOOD stock would naturally want to drift toward $120. However, bullish speculators may want to eyeball the $130 price range as probability density is projected to be quite robust at that point.
Maximizing Robinhood Options' Upside Potential
After conducting a distributional analysis of HOOD stock, we can see that of the many realities that it prints following the 4-6-D sequence, outcomes generally tend to materialize between $118 and $135. It's not that other price ranges aren't possible; just that they're unlikely.
More importantly, we know that beyond $135, probability decay accelerates sharply. Between $135 and $140, probability density drops by about 46%. Between $140 and $150, density absolutely plunges by 99%. Therefore, to maximize probabilistic potential — and minimize opportunity cost — we would want to cap our upside at $135.
Why limit upside to that point, you might ask? As options traders on the debit side, we don't want to pay for more premium than what the underlying stock is likely to justify. Of course, we don't know for sure whether HOOD's upside ceiling is $135 — that's always the risk. But the math points to this figure being a resistance line, if you will.
As such, we'll pay for what is probable and discount what is not. In other words, buy the reality, sell the fantasy.
Based on the evidence, the 130/135 bull call spread expiring Feb. 20, 2025 arguably represents the most sensible among aggressive debit strategies. If HOOD stock rises through the second-leg strike ($135) at expiration, the maximum payout is over 194%. Just watch the breakeven threshold, which is quite high at $131.70.
A more forgiving version would be the 115/135 bull spread also expiring on Feb. 20. However, the max payout will drop to around 156%.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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