As an investment prospect, mobile technology company AppLovin (NASDAQ:APP) offers significant upside potential. According to its public profile, AppLovin helps developers market, monetize, analyze and publish their apps through its mobile advertising, marketing and analytics platform. While APP stock has been quite choppy this year, in the trailing month, shares gained nearly 28% of equity value.
Normally, investors may be tempted to avoid such names under the premise that most of the good news has already been baked in. However, a quantitative signal — one forged under the context of market breadth — suggests that there could be more room for growth.
As a baseline, all options strategies start with a probabilistic canvas. On any given week, the chance that a long position in APP stock will be profitable is only 52.8%. Functionally, this ratio is calculated trough a simple rise over run equation: you take the number of positive weeks and divide it by the total number of weeks in the dataset.
From here, most options traders apply a behavioral model, typically a lognormal distribution to determine the shape of probabilistic outcomes. Later, stochastic analyses and partial derivatives — we’re talking about metrics such as implied volatility and the Greeks — help finetune the range of possible price forecasts.
Personally, I prefer the Russian school of probabilistic analysis, which involves a mathematical process called discretization. Rather than model the randomness of price discovery, I discretize this discovery process into core market breadth data: accumulation (up weeks) and distribution (down weeks).
Following discretization, I analyze the probabilities of various sentiment regimes, taking note of favorable variances between context-driven probabilities and baseline odds.
Utilizing the above approach, APP stock in the past two months printed a “6-4-U” market breadth sequence: six up weeks, four down weeks, with a net positive trajectory across the 10-week period. Notably, in nearly 63% of cases, the following week’s price action resulted in upside, with a median return of 5.82%.
If the implications of the market breadth sequence plays out as predicted, APP stock could hit $374.91 within a week or two. Should the bulls maintain control of the market, it’s quite possible that over the next month, APP could hit $385. Therefore, speculators should keep close tabs on the mobile tech company.
What’s particularly attractive about this setup is the significant transition in long-side odds. Under baseline conditions, the bullish trader only has a 2.8% advantage over a coin toss. However, when it comes to the present sentiment regime, the odds have shifted to nearly 63%. At the same time, market makers are likely pricing risk based on the 53% figure.
In other words, APP stock options could be favorably mispriced.
Take a look at the 360/370 bull call spread expiring June 6. This transaction involves buying the $360 call and simultaneously selling the $370 call, for a net debit paid of $470. Should APP stock rise through the short strike price at expiration, the maximum reward stand sat $530, a payout of nearly 113%.
Given the current sentiment regime, APP could potentially blow past the $370 short strike price. This mispriced call spread deserves your attention if you’re into smart speculation.
