As a rule of thumb, you should avoid publicly traded enterprises that have lost 50% of market value on a year-to-date basis. When a company tumbles that badly, there’s a reason for it — and usually not a good one. However, I’m going to make an exception for footwear specialist Deckers Outdoor Corp (NYSE:DECK).
To be clear, Deckers is a mess. Best known for its primary brands UGG and HOKA, these two units combined for $4.76 billion of the company’s $4.99 billion in total sales, according to Motley Fool. However, sales growth slowed dramatically during the company’s fiscal fourth quarter, raising concerns about the health of the consumer.
It’s no secret that the economy has been struggling, mainly with elevated costs of living stemming from the Covid-19 crisis and later with the Trump administration’s tariff policies. Throw in the uncertainty associated with the current geopolitical climate and you can see why DECK stock has struggled. In the past month, it dropped just over 20%.
At the same time, fundamental analysis can only do so much, providing broader context and color. That’s more of a “why” question. When it comes to trading (especially options trading), the emphasis shifts toward the “how” — how much, how fast and, most importantly, how likely.
Stated differently, traders live in a world of probabilities and for this group of market participants, the most useful form of probability is conditional. However, in the field of financial analysis, the methodologies of fundamental and technical analysis center on derivative probabilities.
The problem with this approach is that derivative probabilities represent odds of the entire aggregate distribution: think last season’s batting average. What you’re really after is the probability of the now, the conditional odds. This is where you have situational stats like batting average when there are runners in scoring position (RISP).
In other words, I want to know how DECK stock performs in the clutch. As it turns out, it just might perform surprisingly well.
Using traditional methodologies for financial analysis, there is a temptation to rely on continuous scalar signals, such as share price or various valuation metrics such as price-to-earnings ratios. However, one of the critical issues of using such signals for analysis is the inability for categorization. Subsequently, all the probabilistic analyses that stem from these approaches are inherently derivative in nature.
For example, a main concern that typical financial publications cite regarding Deckers Outdoors is the slowing growth rate. Simultaneously, DECK stock has witnessed severe deflation, which may lead to the conclusion that the security is undervalued, that the market is somehow mispricing DECK. Now, I also believe that there’s opportunity here but there’s no first-order principle that a low sales or earnings multiple means anything.
Price, financial ratios and their various derivatives — these are all data points rather than defined states of existence.
In contrast, market breadth — or the sequence of accumulative and distributive sessions — is very much a discretized concept. To put it another way, market breadth is a representation of demand and demand is a binary construct: it’s either happening or it’s not. Further, demand being a defined state also doubles as a first-order principle. For example, when the balance of accumulative sessions is greater than distributive sessions, more buyers have entered the fray.
By identifying such demand profiles, we can better determine what the current sentiment regime is, along with the likelihood of transition to another regime.
In the past two months, DECK printed a 6-4-D sequence: six up weeks, four down weeks, with a net negative trajectory across the 10-week period. In 62.86% of cases, the following week’s price action results in upside, with a median return of 3.04%.
On Friday, DECK stock closed at $101.48. If the implications of the 6-4-D pan out as projected, the security could reach $104.56 in short order. Should the bulls maintain control of the market, it’s possible that DECK could rise just above the $106 level over the next three weeks.
Obviously, the simplest way to play the numbers game is to buy DECK stock in the open market. However, for the biggest bang for the buck, a multi-leg options strategy may be enticing. Those who want to take a shot may consider the 100/105 bull call spread expiring July 3.
The above transaction involves buying the $100 call and simultaneously selling the $105 call, for a net debit paid of $275. If DECK stock rises through the short strike price ($105) at expiration, the maximum reward is $225, a payout of nearly 82%.
Part of what makes this trade so attractive is the implied shift in sentiment regime. As a baseline, the chance that a long position in DECK stock will be profitable over any given week is 54.76%. However, the 6-4-D shifts the odds favorably, making DECK an intriguing idea for discount hunters.
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