Options on cell phone by Trismegist san via Shutterstock
Here’s a dirty little secret about unusual options screeners: every day, you’re going to find securities that trigger the algorithm due to their aberrant transactions relative to prior trends. But that doesn’t mean that every single idea on the list is worth a hoot. You got to find a way to mathematically pinpoint probabilistically enticing trades. Otherwise, you’re going to be chasing noise.
For those who are looking for an empirically compelling idea, Samsara (IOT) should be on your radar. In my column “The Saturday Spread,” I mentioned that the fleet management and safety platform provider — which is one of the leaders in applied artificial intelligence — may have a realistic chance of moving higher due to a rare quantitative signal.
We’ll get to that point later. More recently, IOT stock was one of the highlights in Barchart’s Unusual Stock Options Volume screener. On Friday, total options volume hit 9,562 contracts, representing a lift of 52.12% over the trailing one-month average. Call volume reached 8,531 contracts, with put volume down at 1,031 contracts, yielding a put/call ratio of 0.12.
On the surface, this ratio seems bullish, implying that more trades are engaging calls than puts. However, options flow — which focuses exclusively on big block transactions likely placed by institutional investors — showed that net trade sentiment on the day slipped to $131,200 below parity, thus favoring the bears.
Most of the calls? They were sold calls, otherwise known as credit-based transactions. In other words, traders were underwriting the risk that IOT stock would not rise to the profitability threshold, which is around $44.20 with an expiration date of Sep. 19, 2025.
While the options flow data might seem discouraging at first, as adventurous speculators, we can still aim for profitability below the aforementioned implied ceiling.
In any real analysis, the study must disclose a null hypothesis. Regarding the equities sector, the null hypothesis is the assumption that there is no mispricing. In other words, whether you read this article on IOT stock or not, your performance will not deviate from expected norms. Therefore, our job as analysts is to reject the null — that is, present an investment or trading idea that has a higher-than-random chance of generating alpha.
In this case, I have defined my null hypothesis as the baseline probability of IOT stock rising over a one-week period, which is 52.66% (from January 2019 onward). So, my alternative hypothesis must reliably beat this performance stat; otherwise, there would be absolutely no point in writing this article. Luckily, I’m not in the business of wasting my own time.
To deliver an empirical, falsifiable signal, though, I cannot use the continuous scalar signal of the stock price. Instead, I prefer to compress (discretize) price action into market breadth or sequences of accumulative and distributive sessions. Through this approach, I’m able to analyze root demand — at the end of the session, was the market a net buyer or net seller?
By conducting the above exercise across rolling 10-week intervals, I was able to categorize Samsara’s demand profile as below:
L10 Category
Sample Size
Up Probability
Baseline Probability
Median Return if Up
2-8-D
2
50.00%
52.41%
5.32%
3-7-D
11
54.55%
52.41%
7.00%
3-7-U
2
0.00%
52.41%
N/A
4-6-D
23
65.22%
52.41%
6.21%
4-6-U
5
80.00%
52.41%
11.61%
5-5-D
26
61.54%
52.41%
6.37%
5-5-U
20
60.00%
52.41%
4.27%
6-4-D
11
45.45%
52.41%
7.11%
6-4-U
42
42.86%
52.41%
5.19%
7-3-D
1
0.00%
52.41%
N/A
7-3-U
19
57.89%
52.41%
6.08%
8-2-U
4
25.00%
52.41%
19.07%
9-1-U
1
0.00%
52.41%
N/A
In the past two months, IOT stock flashed a 4-6-D sequence: four up weeks, six down weeks, with a negative trajectory across the 10-week period. Ordinarily, with the balance of distributive sessions outweighing accumulative, you would expect the bears to dominate proceedings. However, the 4-6-D historically represents a sentiment reversal.
In 65.22% of cases, the following week’s price action results in upside, with a median return of 6.21%. Should the bulls maintain control for a second week, the median performance is an additional 3.75%. Theoretically, with IOT stock closing at $39.24, it could be poised to exceed the $43 level over the next few weeks.
Interestingly, last week, IOT also flashed the 4-6-D sequence and from Friday, the trailing five-day performance was 5.03%. It’s possible, then, that there could be something cooking here.
At this moment, arguably the most tempting idea is the 40/41 bull call spread expiring Aug. 15. This transaction involves buying the $40 call and simultaneously selling the $41 call, for a net debit paid of $50 (the most that can be lost in the trade). Should IOT stock rise through the short strike price ($41) at expiration, the maximum reward is also $50, a 100% payout.
Now, the question may be, how trustworthy is the 4-6-D sequence? With the market being an open system, anything can happen, which adds complexity to any transaction. However, running a one-tailed binomial test, the aforementioned sequence generates a p-value of 0.1594. Colloquially, this means that there’s an 84.06% confidence level that the signal is not merely noise.
To be sure, 84.06% would not be considered statistically significant, with science requiring a threshold of 95%. But science deals with closed systems, not open ones like the equities arena. In context, I would argue that the 4-6-D sequence is empirically intriguing. With the high payout and low debit required, it might be worth consideration.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
