Why Marvell Stock’s Post-Earnings Malaise Offers Another Shot

I hate earnings season. Sure, there are many debit-side options traders that claim to love it and there’s a reason for that — basically, it comes down to the heightened implied volatility (IV). But as Marvell Technology (MRVL) recently demonstrated, this sharp movement is a double-edged sword. You just don’t know what may actually transpire, which is why MRVL stock has given up significant value.

At the same time, the red ink presents a contrarian opportunity for bold, data-driven traders. If you’re the risk-tolerant type, MRVL stock may have just provided another chance to scalp some quick profits.

Here’s some background details. On Aug. 12, I stated that Marvell stock may enjoy a quick bounce before its second-quarter earnings report (which was released on Aug. 27). Given that the artificial intelligence boom has been red hot, it was natural to assume that the semiconductor specialist would beat its headline numbers (as was the case).

However, despite the strong results on paper, MRVL stock sold off. In the past five sessions, the ticker lost more than 11%. Despite the sales and earnings beat, “investor sentiment turned cautious due to compressed near-term margin guidance,” according to Google Finance’s summary sheet.

That was actually one of the first things I said in the aforementioned article: “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.”

Moreover, I pointed to the fact that at the time of publication, the volatility skew hinted at a cautious approach by the smart money. So, there were pre-earnings indicators that suggested Marvell stock could suffer a disappointing performance following its Q2 disclosure.

So, why did I highlight the Aug. 21 212.50/220 bull call spread — which was ultimately fully profitable — as a trading candidate? The order flow balance at the time inductively suggested a quick pop was due.

MRVL Stock is Flashing the Same Quant Signal as Before

Back during Aug. 12, Marvell stock had printed a rare quantitative sequence. In the last 10 weekly sessions, only three of the weekly candlesticks were positive, leading to an overall downward slope across the period. There’s nothing inherently special about this 3-7-D sequence as it’s just a static, discretized factoid. But it’s what tends to happen next that’s intriguing.

Since January 2019, the above quant signal has flashed 37 times. On the second week following the signal, MRVL stock has reached the equivalent of the $220 second-leg strike price 18 times (48.6% success ratio) and on the third week (the equivalent of the Sep. 18 expiration date), the hit rate is 17 times (45.9%).

While these aren’t what I would call amazing odds, intrepid speculators may have a case in considering the 215/220 bull call spread expiring Sep. 18. With this trade, the breakeven price is set at $217.30. Under the above framework, the expected probability of breaking even would be 56.8% (21 times) for both weeks 2 and 3.

That’s a significant detail because Wall Street’s options pricing mechanism implies a probability of profit (breakeven) of only 41.8%. And if you were to reverse engineer Barchart’s Expected Move calculator, the odds of Marvell stock hitting the $220 strike at expiration is only 35.69%.

Thus, we have a bit of a dilemma. Through an analysis of historical data and inductive reasoning, I’m coming up with a probability of full profitability of 45.9% on Sep. 18. Who’s right?

Honestly, we won’t know until the expiration date rolls around and falsifies the various models used to forecast the MRVL stock price. Since we’re dealing with the unknown future, we’re inherently working with presuppositions.

It’s like asking what happens to us when we pass on…nobody knows. Ultimately, we’re just trying to build a cumulative case with what limited evidence we have. However, in my defense, one of the pieces of evidence that we do have is past data — and if we inductively analyze that, there appears to be a rational case for believing in the $220 target.

Making a Nonrandom Case for Marvell Stock

Fundamentally, what separates my probability calculations from Wall Street’s standard mechanism is that I’m presupposing a nonrandom walk. I could be wrong about this but I wholeheartedly believe that the next three weeks will feature nonrandom price discovery.

As I said earlier, MRVL stock printed mostly negative weekly candlesticks over the past 10 weeks. In my opinion, that’s going to result in a nonrandom response, particularly because institutional investors may view the wave of red ink as a possible discounted opportunity.

If there were an even split between positive and negative weekly candlesticks, I’d be more prone to believing that the future outcome may be random. But the last 10 weeks have overall been sharply negative. With the weak hands having apparently been flushed out, I think there’s a statistical case for a contrarian, positive move.

Referencing my Aug. 12 article, the 3-7-D sequence is exactly the reason why I thought that there might be a quick bounce. I’m not guaranteeing a repeat performance, to be sure. Still, if you do want to take another risk, Marvell stock should definitely be on your radar.