Meta Platforms Stock Could Be Signaling a Quick Pop Above $600

If you were to ask me where Meta Platforms (META) would land over the next three weeks, I wouldn’t have a clue. I would simply have to refer to the Expected Move calculator, which would likely have the correct range: outside of extraordinary circumstances, we would expect META stock to land somewhere within a standard deviation of the current spot price.

However, if you were to give me a quantitative context, that would allow me to potentially narrow down the list of forecasted answers. That’s because we can look back in history to see where META stock incurred the same context and calculate forward what the median expectation might be over the next three-week period.

Consider a hotly contested football game between two evenly matched rivals. Prior to kickoff, the probability of either team winning the game might be 50/50. However, let’s suppose something significant happened to one of the teams — perhaps one of the starting quarterbacks going down with an injury.

Are the odds still 50/50? I doubt it. Las Vegas will quickly make their adjustments, with the probability of victory clearly leaning toward the team with the still-healthy QB.

Well, my theory is that this concept is no different in the equities market. Without the benefit of context, we’ll just have to assume that Meta Platforms stock will take a random walk. But with additional context, we may be able to determine where META is more likely to land.

It’s not just because META stock is taking a nonrandom walk. Rather, instead of taking a 50/50 bet, the context may allow us to assess — through inductive reasoning — that the deck of cards is biased, perhaps 60/40 in our favor.

And that’s simply my proposition today: Meta Platforms stock is taking a nonrandom walk and we know where such journeys typically end.

What’s the Deal with the Nonrandom Walk for META Stock?

I want to harp on this point because it’s central to how many quantitative traders approach the equities market. You’ve probably heard the term ‘random walk’ several times. Basically, this concept implies that stock prices are not predictable. It’s a random process, like flipping coins. If you flip enough coins over the long run, the odds of flipping heads are 50%.

Sure, you can go through certain streaks where the coin flips appear nonrandom. But again, if you keep flipping enough times, the long-term probability converges toward 50/50.

However, a nonrandom walk is different. In this case, one side of the coin is weighted so that it lands more often than the other side. If we knew which side is weighted, there’d obviously be a mathematical incentive to pick that over the non-weighted side (if there was money being put on the table).

So, the next question is naturally: why do I believe that Meta Platforms stock is about to undergo a nonrandom walk (meaning that the ticker may be predictable)? Again, it comes down to context.

In the last 10 weeks, META stock printed only three up weeks, thereby leading to an overall downward slope across the period. Yes, this 3-7-D quantitative sequence might just look like a statistical anomaly and nothing more. And to be sure, there’s nothing special about it — except for the fact that we can look back in history and discover its past analogs.

What we find is that this sequence has flashed 21 times on a rolling basis since January 2019. When it does so, there are certain periods — specifically week 3 and week 5 following the signal’s appearance — where META stock experiences a conspicuous boost in performance relative to a random hold.

If I want to use options jargon, I’m anticipating a positive volatility cluster in weeks 3 and 5. In other words, instead of a gradual incline, the data supports the potential of a sharper-than-normal upswing for the aforementioned time periods.

Putting Theory into Action

From an inductive analysis of past analogs, Meta Platforms stock is projected to hit around $615 as a median endpoint at the end of week 3. While it’s a risky proposition, one idea to consider is the 605/610 bull call spread expiring Aug. 21.

What draws me into this particular idea is the bull spread’s relatively low net debit of $255, which is much cheaper than comparable spreads featuring the second-leg strike price of $610. Should META stock rise through this target, the maximum payout clocks in at 96.08%.

Mathematically, the most enticing aspect of this spread is the breakeven price of $607.55. Right now, Wall Street pegs a probability of profit of only 37.2% that this threshold will be met at expiration. However, this assumption comes from the Black-Scholes family of option pricing models, which is significant because this model isn’t what you might think it is.

When Black-Scholes calculates a probability of profit, the model assumes that the security in question is taking a random walk (in a risk-neutral, lognormal environment) from the current spot price to the target price at expiration. Whatever assumptions ared used to calculate this probability of profit are then backed out to arrive at a fair price for today.

Essentially, this just means that Black-Scholes prices today’s options based on the perceived amount of risk that you’re expected to incur in the future. However, this perception is built off a random walk assumption — and as I explained earlier, I think META stock is about to take a nonrandom walk.

Specifically, out of the 21 times that the 3-7-D signal flashed, META stock exceeded the equivalent of the breakeven price of $607.55 a total of 11 times. Conditionally, then, the nonrandom probability of profit may be 52.4%.

That’s a sizable leap from 37.2% odds, which means that Meta Platforms stock could be undervalued relative to the historical risk that traders incurred when facing the aforementioned quant signal.