Market participants seeking relatively quick gains should keep their eyes focused on XP Inc (NASDAQ:XP). Based in Brazil, XP is a technology-driven financial services platform. It offers a broad range of products, from brokerage services to fixed income, credit services and insurance, among many others. Primarily, the company focuses on high-net-worth individuals and institutional clients.
While it might not be a household name among U.S.-based investors, XP stock enjoys broad support from Wall Street analysts. According to TipRanks, XP carries a Moderate Buy rating, breaking down as two Buys and two Holds. Overall, experts’ consensus price target on the equity is $20, implying a modest gain of 7.3%.
Over a 12-month period, such a target is really nothing to write home about. What’s more, from a trading perspective, XP stock doesn’t offer the most enticing picture. Since its public market debut in late 2019, XP has lost almost 51% of value. That’s a stunning erosion, implying great skepticism despite the forward potential.
Not surprisingly, then, XP stock suffers from a negative bias. On any given week, the chance that a long position will be profitable is only 47.18%. In other words, a bullish trader has a 3% disadvantage relative to a coin toss. Under such a framework, selling the uncertainty via a bear call spread might be an appropriate strategy.
At the same time, not all sentiment regimes feature the same probability distribution. This is the genesis of the speculative opportunity in XP stock.
From a market breadth perspective, in the past two months, XP stock printed an “8-2-U” sequence: eight up weeks, two down weeks, with a net positive trajectory across the 10-week period. Notably, in 75% of cases, the following week’s price action results in upside, with a median return of 4.79%.
Assuming that the forecast plays out as projected, XP stock could soon hit $19.53, perhaps in a week or two. By the fourth week, if the bulls manage to maintain control of the market, XP could rise to $19.58.
What truly stands out about this trading setup is the remarkable shift in probabilities. Again, under random conditions, the chance of upside in XP stock is worse than a coin toss. However, in the immediate response to the 8-2-U market breadth sequence, the odds dramatically favor the bullish speculator. As such, there’s a clear incentive to consider a debit-based long-side strategy.
Those who believe in the numbers game may consider the 19/19.50 bull call spread expiring June 20. This transaction involves buying the $19 call and simultaneously selling the $19.50 call, for a net debit paid of $30. Should XP stock rise through the short strike price at expiration, the maximum reward stands at $20, a payout of nearly 67%.
What’s attractive about this trade is that, from an empirical standpoint, XP stock should be able to hit $19.50 relatively quickly. Further, the most that can be lost in the trade is the net debit or $30. For those just getting started in the world of multi-leg options trading, XP offers a tempting idea.
