AST SpaceMobile (ASTS) easily ranks among the most difficult names on Wall Street to decipher. There’s no question that the space economy represents a tremendous, multi-trillion-dollar growth potential. Further, aggressive traders have loved the high beta of ASTS stock, allowing them to pocket massive profits — assuming that they timed the market correctly.
Get it wrong, though, and you’d likely be looking at severe losses. That’s one of the challenges behind AST SpaceMobile stock. While the potential is evident, actualizing it has been https://www.barchart.com/stocks/quotes/ASTS/interactive-charta different matter.
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For those who prefer a buy-and-hold approach, ASTS stock has been quite disappointing this year. Since January’s opening volley, the ticker has slipped 17.51%. More recently, the damage has been acute. For example, in the trailing month, AST lost more than 16% of equity value. Subsequently, it triggered a 100% Strong Sell rating from the Barchart Technical Opinion indicator.
A good portion of the dilemma comes from the deadlocked fundamentals. According to Google Finance, AST has benefited from a robust revenue backlog and operator ecosystem. Business-wise, it has also launched several satellites and has scaled production significantly. At the same time, surging capex and heavy operational burn have raised concerns.
Glaringly, the company also suffered an earnings and revenue miss in the second quarter, contributing to the recent downcycle in ASTS stock. The bottom line appears to be that the cellular broadband network specialist has no shortage of ambition. Unfortunately, positive rhetoric alone isn’t going to move the needle, especially when the financial realities are coming to roost.
It’s no surprise, then, that even the technicals look rather ominous. Again, it’s difficult to tell what the long-term investment case may be for AST SpaceMobile stock. What can be said, though, is that the contrarian options setup looks rather tempting.
Negative Order Flow Imbalance Could Spell Opportunity for ASTS Stock
A common adage in the market is to buy low and sell high. As such, I think it’s fair to say that retail traders looking for discounts tend to screen for the biggest losers rather than the biggest winners. With the latter, there’s an assumption (rightly or wrongly) that buying too strong of a security exposes you to the risk of holding the bag.
On the flipside, the contrarian assumption (which isn’t always earned, I might add) is that if a ticker is beaten up badly, it probably won’t decline much further. There might be some wisdom in this thinking — depending on the security of course — but it’s obviously better to infer this trend from empirical data rather than emotions and vibes.
That’s the whole point of analyzing securities based on their discretized order flow balance. By standardizing the language of price action, we can identify and condition outcomes based on specific signals.
And what is AST SpaceMobile stock signaling? In the last 10 weeks, ASTS has only managed to print two positive weekly candlesticks, thereby leading to a downward slope across the period. You have to think about this for a moment: 80% of the weekly sessions during the aforementioned period were negative. My hypothesis, then, is that this particular circumstance will lead to a nonrandom response.
Basically, the assumption is that contrarian market participants will view ASTS stock as a possible discount, perhaps due to the concept that the weak hands have been flushed out. If so, there might be less resistance to the upside, as the bearish pressure will have subsided from nervous stakeholders having already rushed for the exits.
The difference is, we’re not just assuming this trend. By filtering for the 2-8-D (2 up weeks, 8 down weeks, downward slope) quantitative sequence, we can identify that ASTS stock has a tendency of rising higher following the flashing of the signal, beginning in the fifth week.
Based on this implication, the 60/65 bull call spread expiring Oct. 16 looks enticing.
Different Presuppositions Yield Different Probabilistic Outcomes
Should AST SpaceMobile stock rise through the $65 second-leg strike price on the Oct. 16 expiration date, the maximum payout would be 150%. That means the net debit of $200 to enter the trade would become a profit of $300. While it is a tempting proposition, it comes with a warning: it’s a low-probability affair.
Right now, the breakeven price is set at $62 and Wall Street’s options pricing mechanism implies a probability of hitting this threshold at expiration of 44.2%. If we were to reverse-engineer Barchart’s Expected Move calculator, we would find out that the chance of ASTS stock hitting the $65 strike is only 33.42%.
You don’t have to run a formal expected value (EV) calculation to see the problem. Since you’re only winning full profitability just over a third of the time, running this exact trade across multiple parallel universes will easily see you blow up your portfolio.
However, it’s important to realize that the Street is calculating these low probabilities based on a presupposition. Essentially, it assumes that ASTS stock will undergo a random walk between now and the expiration date. Under this mathematical construct, ASTS only has a very low chance of triggering the $65 target.
Where the disagreement comes in is that my presupposition assumes that AST SpaceMobile stock will undergo a nonrandom walk for the aforementioned journey. I believe this is the more logical case because of the bearish order flow imbalance.
Again, 80% of the last 10 weeks’ worth of (weekly) candlesticks were painted red. Historically, this condition has often led to a contrarian move. Of the 44 times that the 2-8-D sequence has flashed on a rolling basis since AST’s public debut, the ticker has exceeded the equivalent of the $65 strike a total of 19 times on week 5 (Oct. 16).
At a 43.2% success rate, we’re still talking about a high-risk trade. Still, it’s noticeably better than 33.42%. In addition, ASTS stock would be expected to break even nearly 48% of the time, helping to improve the speculative case.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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