Marvell Technology (MRVL) Stock Might Offer a Quick Bounce Before Earnings

All eyes will be on Marvell Technology (MRVL) when the integrated-circuits giant delivers its second-quarter earnings report on Aug. 27 after the closing bell. While major financial disclosures offer robust opportunities, they also carry significant risk. Even if the results are positive, the market may interpret forward guidance in a variety of ways, thus clouding MRVL stock.

Also, if I’m being honest, I’m not particularly enthused with Marvell’s volatility skew for the Aug. 28 expiration date. While the skew is of course subject to change day by day — and quite wildly in some circumstances — the current structure hints at a cautious approach by the smart money. Again, it’s difficult to interpret these matters but that’s not a high-confidence signal for MRVL stock.

So, I’m not necessarily in the most optimistic of moods for a heavy bet on the semiconductor company. But a near-term options wager? If you have some loose cash burning a hole in your pocket, the Aug. 21 212.50/220 bull call spread may be an interesting idea for the speculator.

Why do I think Marvell stock has the capability to reach the $220 second-leg strike price? At a 3.62% lift from Tuesday’s market close, it’s not the most unrealistic of propositions, especially considering MRVL’s 60-month beta of 2.24. More importantly, an inductive analysis on past conditional data, along with expected value (EV) calculations, makes this idea arguably spicy (but not too spicy).

Rare Order Flow Imbalance Points to Possible Upside for MRVL Stock

Using an aggregate of past empirical data going back to January 2019 — thus making the comparison relevant to contemporary standards — a random 10-week long position in Marvell stock would be expected to rise almost linearly from $212.31 to approximately $222. This latter price would be the median endpoint target, again assuming a random buy-and-hold.

However, I wouldn’t characterize buying MRVL stock today as a random decision. That’s because in the last 10 weeks, the ticker printed only three up weeks, thereby leading to a downward slope. If we were to discretize the quantitative structure of this formation, we might label it as 3-7-D (three up, seven down, downward slope).

In and of itself, there’s nothing special about this quant sequence. But looking back in history, we note that during specific weeks, there are periods of overperformance as well as underperformance. From the statistical data, it just so happens that in the second and third weeks following the flashing of the aforementioned signal, MRVL stock tends to experience a conspicuous rise above the random baseline.

As a median endpoint, we would expect the ticker to inch past the $220 level at the end of week 2, which would be more than enough to trigger the Aug. 21 212.50/220 bull call spread.

Still, some speculators might look at the call spread’s 114.29% max payout and deem it not enough. If you look at the 225/230 spread for the same expiration date, the max payout is 194.12%. So, why the lower-strike, lower-payout trade?

Expected Value Helps Narrow the Field

So, when you’re considering a debit spread, you can’t just fixate on the reward. You have to figure out whether the juice is worth the squeeze.

In my inductive model, I noted that Marvell stock has printed the 3-7-D signal 37 times on a rolling basis since January 2019. In 19 instances, MRVL has exceeded the equivalent of the $220 strike price a total of 19 times at the end of week 2. That comes out to a 51.4% win ratio, which isn’t fantastic but it does something interesting in terms of EV calculations.

Essentially, if the model happens to be an accurate representation of the future — which to be crystal clear cannot be guaranteed — you would expect the Aug. 21 212.50/220 bull spread to pay out $205.60 (0.514 x $400) and to lose $170.10 (0.486 x $350). Theoretically, if you traded this identical setup multiple times over the long run, you would likely net $35.50. This is obviously positive EV.

Now, let’s look at the 225/230 bull spread. You need to pay a net debit of $170 for the chance to win a maximum of $330. That sounds great but in my model, Marvell stock only reaches $230 a total of 11 times at expiration. That’s a terrible win rate of 29.7%, meaning that the reward has to be gargantuan to make up for the probabilistic risk.

So, in 29.7% of cases, you would win $98.01. But in 70.3% of the time, you would lose $119.51. Therefore, in the long run, this identical trade run across multiple frequencies would net you a loss of $21.50.

Caveats to Consider Before Trading Marvell Stock

Of course, EV calculations take into account long-term trends. In any given moment, a positive EV trade can lose while a negative EV trade may win. That’s just life on Wall Street.

As for the inductive model, I think we all generally believe that public securities move in trends and that through this presupposition, we aim to extract alpha. But it’s worth always keeping in mind that just because a pattern has been established does not mean that it’s logically necessary for it to continue forward as expected.

With all that said, the basic idea here is that when we take a disciplined, rational approach to the market, we may be able to tilt the odds in our favor. For MRVL stock, there just happens to be a quant structure that has led to near-term upside — and EV calculations point to the $220 strike as a rational, model-dependent target.