Vistra Corp (VST) Stock’s Underperformance Could Open Up a Contrarian Options Trade

At first glance, Vistra Corp (VST) doesn’t seem like a particularly great investment. It’s not just for the matter that VST stock has incurred an 88% Strong Sell rating by the Barchart Technical Opinion indicator, though that is an obvious distraction. Primarily, the ticker’s 60-month beta translates to an incredibly choppy trajectory that puts confidence in short supply.

However, as an options trade, we may be able to leverage the wild dynamics of VST stock to our benefit. In essence, Vistra represents a fundamentally relevant enterprise, thanks to the company’s integrated retail electricity and power generation. Naturally, artificial intelligence has very strong implications for VST’s broader trend.

As such, it’s not that much of a stretch to assume that institutional trading algorithms are tuned into Vistra stock. Consider that in the trailing month, VST is down 11%. I believe there’s a case here that the algos will move into the ticker due to its relative discount.

There’s also the presupposition that market dynamics evolve based on shifting momentum. For example, if you were to place a wager on two evenly matched football teams, you’d have very little to go on in terms of the decision-making process. However, if you found out before the opening kickoff that one of the teams lost their starting quarterback due to injury, suddenly, the odds would be expected to shift.

Mechanically, I believe the market operates in a similar manner. If VST stock were trading in a “normal” consolidation pattern, it’s going to be difficult to determine where it may head next. However, VST is clearly in a near-term bearish cycle. Because of this reality, I’m going to assume that its forward projection has been altered relative to normal circumstances.

Order Flow Imbalance Points to a Possible Upswing for VST Stock

What is quantitatively distinct about Vistra stock is, as stated earlier, its bearish cycle. Specifically, in the last 10 weeks, VST managed to print only three up weeks, leading to an overall downward slope. This 3-7-D quant sequence is extremely rare, having only materialized 16 times on a rolling basis since January 2019.

Granted, 16 incidences is not something that would generate scientific confidence. However, we do observe a variance in forward performance. If we were to simply buy VST stock at random and hold it for a 10-week period, the expected median distribution of outcomes would likely land between $139.50 and $147 (assuming a starting price of $140.59, Friday’s close). However, under 3-7-D conditions, the 10-week forward distribution shifts between $138 and $152.50.

Generally speaking, when the aforementioned bearish sequence appears on the technical chart, VST stock tends to see a greater magnitude of positive volatility than would be expected under random conditions.

What’s really interesting is that on the third week following the flashing of the quant signal, Vistra stock usually sees a 6.7% swing higher. That would place the ticker right around the $150 price point on the Aug. 28 expiration date. If so, $150 would be a model-derived idea to place a second-leg strike in a debit-based multileg options strategy.

Now, I’m not guaranteeing that VST stock will hit $150 on Aug. 28. You cannot consistently predict these things, especially with this kind of specificity. All I’m saying is that, under the particular quant signal that I referenced, the median endpoint result has been $150 at the end of week 3.

If this is true — and it’s a big “if” — the 140/150 bull call spread expiring Aug. 28 may have a positive expected value. Per the model, half of the time, this Vistra stock bull spread will win the max profit of $560 (or $280). Of course, half of the time, the spread will lose the max loss of $440 (or $220).

Subtract wins from losses over the long run and you get a positive EV of $60.

What’s the Other Side of the Narrative?

Practically speaking, though, trading Vistra stock isn’t that easy. Basically, Wall Street assigns a probability of profit that VST will merely hit the breakeven threshold at expiration of only 41%. That price is listed (at time of writing) at $144.40.

It raises the obvious question: which projection is the correct one? Honestly, nobody knows.

The above probability stems from the Black-Scholes family of formulations. Without getting into the convoluted math, the basic premise of the odds given is that 41% represents the probability of Vistra stock reaching the breakeven point from the spot price, assuming that it takes a random walk given current volatility readings.

My argument is that under 3-7-D conditions, VST stock is more likely to take a nonrandom walk. Further, based on inductive reasoning of prior patterns, I’m assuming that this nonrandom behavior may take VST to $150 on Aug. 28. While you might agree with me that VST’s forward behavior will be nonrandom, no one knows the exact mechanism of how this will pan out.

It also doesn’t necessarily mean that Vistra stock will not exhibit random behavior. It could very well be that, in this particular case, the security will traverse along the path of what Black-Scholes is implying.

Ultimately, in an ecosystem of reflexive uncertainty, my argument is that induction may a rational process of projecting future behavior. If so, we should note that of the 16 times that the aforementioned signal flashed, VST stock has risen above the equivalent of the $144.40 breakeven price a total of nine times at the end of week 3.

Based on the limited information we have, that would make the conditional, model-dependent probability of profit at 56.2%. If you believe this approach is credible, Vistra should be on your radar for a possible short-term scalp.