It’s probably the most common mantra you’ll hear among retail investors: buy low and sell high. The problem, of course, is that this approach is easier said than done. After all, if blindly buying securities when they flash red — like a charging bull — represented a consistently viable approach, practically everyone would be investing gurus.
It’s not easy at all, which is what inspired me to create a pricing projection model called the Probability Gambit (PG). I’ll be using this approach to assess the viability of tech stocks that have recently witnessed significant volatility.
Under this approach, I compare baseline probabilities of a given security against its dynamic probabilities. Stated differently, each stock features a natural cadence or rhythm. However, under certain fluctuations against the normal fear-greed spectrum, pricing behaviors of the security can change. For the scientists out there, it’s the reason why satellites can’t rely on Newtonian mechanics but rather general and special relativity.
To put it much more simply, the PG model is similar to the regression calculator in the Excel spreadsheet. However, rather than being a mathematical exercise, the regression in PG reflects actual, empirical data of the security itself.
To be clear, PG isn’t perfect — nothing is. However, in my opinion, it’s a far more instructive mechanism to answer the question on everyone’s mind: are these discounted tech stocks really a good deal? Let’s consider three compelling candidates.
Cybersecurity specialist CrowdStrike (NASDAQ:CRWD) easily ranks among the most promising tech stocks on discount thanks to its underlying relevance. Last week, CRWD suffered a loss of 9.96% between Monday’s open and Friday’s close. However, given that Monday’s decline of nearly 4% was quite severe, I’m going to model CRWD stock as if it suffered a double-digit percentage loss last week.
Using empirical data extending back to the summer of 2019 — and thus accounting for the ebb and flow of the Covid-19 cycle — CRWD features an upward bias. A position entered at the beginning of the week has a 56.38% chance of rising by the end of it. Over an eight-week period, this baseline probability shoots up to 65.29%.
Under dynamic conditions — in this case, accounting for the recent extreme volatility where MRVL stock suffers a loss between 10% and 20% in a one-week period — the security sees bullish activity resume following a bout of uncertainty. Notably, in the third subsequent week following an extreme-fear event, long odds rise to 61.9%. Further, the sampling size of this dataset is 21 weeks (entry points), providing relative confidence in the assessment.
Now, assuming the positive scenario, it’s possible to see MRVL stock rise by 10.17% by the options chain expiring March 14. This forecast implies a nominal price target of $431.55 based off Monday’s close of $391.72.
Aggressive traders can target the 405/415 bull call spread. This idea requires the trader buy the $405 March 14 call and simultaneously sell the same-expiration $415 call. Should MRVL reach or exceed the short strike target, the trader would collect the maximum reward (where the payout presently stands at 115%).
Another enticing opportunity among tech stocks, Akamai Technologies (NASDAQ:AKAM) enjoyed a modest gain on Monday. However, that couldn’t exempt the bad taste that investors had in their mouths. Last week, AKAM stock suffered a decline of 23.28%.
Under normal or baseline circumstances, investors have an incentive to acquire AKAM on the dips. Using data extending back to January 2019, a position entered at the beginning of the week has a 57% chance of rising by the end of it. Over an eight-week period, the long odds fluctuate slightly but end up culminating at 58.28%.
As for dynamic conditions — specifically involving AKAM stock losing 20% or greater in a one-week period — we’re walking on unprecedented territory. Out of a dataset that extends back over 300 weeks, there are simply zero instances of such severe losses.
What I can tell you is that in the next available downside performance bucket — where AKAM stock loses between 10% and 20% — there have been six instances. While it’s obviously a limited dataset, under these conditions, the long odds in the second subsequent week following extreme fear rise to almost 67%.
If you want to speculate, AKAM may rise by 3.1% to $80.05 by the options chain expiring March 7. Therefore, the high-risk trade that would arguably make the most sense is the 75/80 bull call spread for the aforementioned expiration date.
Finally, Arista Networks (NYSE:ANET) was one of the high-profile tech stocks that suffered from the sector-wide backlash. Last week, ANET lost 9.9% of equity value. However, it really had an awful Monday, losing 5.71%. Therefore, I believe it’s appropriate to model the security as if it suffered a double-digit percentage decline last week.
Under normal circumstances, ANET stock enjoys an upward bias. Using data from January 2019 onward, a position entered at the beginning of the week has a 56.39% chance of rising by the end of it. Over an eight-week period, this baseline probability rises noticeably to 62.1%.
Under dynamic conditions when ANET stock loses between 10% and 20%, the security maintains its overall bullish posture. Yes, the sample size is small, only 10 instances. However, the pricing behavior dynamically aligns with the baseline so it’s not much of a stretch to assume that investors indeed buy the dips.
The key distinction in the behavioral dynamics, though, is that the forward bias is pushed forward. In the subsequent week following extreme volatility, ANET’s long odds rise to 70%. In the second week, the longs dip to 60% and stay there for the next eight weeks.
Assuming the positive scenario, ANET could potentially rise between 7.56% to 13.64% by the options chain expiring March 7. This translates to an upside target ranging from $99.70 to $105.34. If you’re really aggressive, you could target the 98/100 bull call spread for the aforementioned expiration date.
At time of writing, the above transaction offers a whopping payout of almost 264%.
