Here’s Why NextEra Energy Stock Might Be a Great Options Trade Hiding in Plain Sight

For those who love options trading, NextEra Energy (NEE) might very well be considered an ideal candidate. That might sound strange at first glance because of how unsexy the core business is. After all, why bother spending too much time on NEE stock when you have so many other hot names, such as semiconductor companies or AI playsz, at your disposal?

Further, the soft performance of NEE stock would seem to negate any excitement. On a year-to-date basis, shares are up 9%, which is decent but not particularly jaw-dropping. Plus, its recent print is quite shallow, losing 0.43% in the trailing five sessions. NextEra has failed to convince the Barchart Technical Opinion screener, which rates NEE as a Weak Sell.

However, from a quantitative trader’s perspective — who focuses on the mechanical structure of the market rather than the fundamentals — NextEra is a dream. That’s because those who are speculating on NEE stock enjoy some semblance of stationarity.

As you know, quants rely heavily on pattern recognition. In other words, we’re observing the tendency of how NEE stock responds given a specific condition, circumstance or signal. It’s somewhat similar to the logic of the technical analyst when they get excited about a cup-and-handle formation (because it allegedly leads to a greater chance of upside).

But what universally blows up both quants and technicians is shifting sentiment regimes. For example, it’s easy to say that a cup and handle is a bullish signal in a bullish regime…but what if the regime changed to a consolidatory or bearish cycle? Suddenly, we may not be able to make the same assumptions of the cup and handle.

What makes NEE stock so compelling for quants is that utilities are what they are. As basically regulated monopolies with a state-guaranteed return on equity, these companies don’t have to innovate, they don't have to launch new product lines and they don't have to worry about a competitor stealing their market share overnight.

Theoretically, we can focus on the mechanics and that’s what we’re going to explore next.

NEE Stock Offers Structural Stability for Speculators

For the most part, the era of finance nerds in nice suits analyzing reams of quarterly statements to help major institutions make trading decisions is over. Thanks to high-frequency trading and other algorithmic technologies, information is traded on in terms of nanoseconds. So, in my opinion, attempting to play the information velocity game is a non-starter.

What also must get thrown out the window is that independent contributors like me somehow can deliver an edge through superior analysis. While anything is possible, it is almost a certainty that whatever material public information is available has already been digested in the share price. Thus, the only place where we can potentially find an advantage is in market structure.

Under this framework, NEE stock is beautiful because the core nature of its business won’t change. That’s not true for a tech hardware play, which can easily be disrupted internally (through missteps), externally (via competition) or broadly (by shifting industry paradigms). Subsequently, we may reasonably assume that NEE will respond uniformly to specific, quantitative triggers.

One of these triggers is mean reversion. Since the end of April, NEE stock has slipped roughly 11%, which is a sizable loss for a utility. Here, we may propose that NEE may mean revert back toward a higher baseline level, in part because all other things are largely equal. Again, a utility is about building infrastructure or generating electrons — that’s it.

Since there’s no other complex narrative influencing NextEra stock, in my view, it’s more likely to attract the algorithms, which may quantitatively assess NEE as a discount.

In fact, in the last 10 weeks, NEE stock has only printed three up weeks, leading to a downward slope. When conditioned for this 3-7-D sequence, we may expect a forward 10-week distribution between $83 and $97 (assuming a starting price of $87.44). This leaves a more potent distribution than what we would expect if we traded NEE randomly, which would result in a 10-week distribution between $86 and $91.

Drilling Further into the Details

One of the more important nuances of NEE stock is that the expected performance variance between the signal and the random baseline is not consistently linear across the entire 10-week spectrum. Rather, the variance is statistically most pronounced between the sixth and ninth week following the flashing of the 3-7-D signal.

As such, I’m interested in a further-dated options play; specifically, the 90/92.50 bull call spread expiring Sept. 18. Based on the inductive logic mentioned above, the projected mean reversion of NEE stock should be able to clear the $92.50 strike at expiration. If it does, the maximum payout stands at 147.53%.

Fundamentally, the reason why the payout is so large is that the market only offers a 36.3% probability that this particular bull spread will break even. This calculation is largely a function of how many standard deviations the breakeven threshold is from the current NEE stock price, assuming a log-normal distribution of outcomes.

However, the difference between my analysis and Black-Scholes derived calculations is that I theorize that the distribution of outcomes will likely change based on the current condition of the target security. Because NEE stock is currently in a bearish cycle, the data demonstrates a higher probability that NEE will eventually mean revert higher.

Now, we must be crystal clear that we cannot assume the uniformity of nature. In other words, just because NEE stock has demonstrated a tendency of positively mean reverting following the 3-7-D signal does not necessarily mean it will do so this time around.

I’m just saying that historically, under similar quantitative conditions, NEE stock has moved higher more often than it has moved lower. Therefore, a chance exists that the market is overly pessimistic on NextEra Energy. If so, this is a great idea for speculative traders to consider.