Thanks to MicroStrategy (MSTR) effectively becoming a proxy for the cryptocurrency ecosystem, it wasn’t unusual to see MSTR stock represented within Barchart’s screener for unusual stock options volume on Friday. The interpretation of the data was, however, a completely different story.
When the dust finally settled on the final trading session of November, MicroStrategy options volume totaled 495,180 contracts against an open interest reading of 2.68 million contracts. But the former figure represented a 13.82% decline from the trailing one-month average volume. Stated differently, traders apparently weren’t that interested in MSTR stock.
Drilling into the details, call volume soared to 304,097 contracts versus 191,083 puts, yielding a put/call volume ratio of 0.63. On paper, this framework seems bullish. However, options flow data — which focuses exclusively on big block transactions likely placed by institutional investors — revealed that net trade sentiment was $51.23 million below parity, thus favoring the bears.
So, those calls that made up the unusual options activity screener? It turns out that the alpha dogs may be selling these options, potentially making them bearish. Frankly, it’s not the most unexpected posture. With MSTR stock gaining almost 69% in the trailing month, some pullback may be reasonable.
The Fundamentals Paint a Confusing Picture for MSTR Stock
As if deciphering the unusual options activity wasn’t enough of a headache, the fundamentals haven’t exactly added lucidity to MicroStrategy’s anticipated trajectory. Investors from opposing sides of the directional spectrum have justification for their beliefs.
Initially, during the early stages of the Friday session, MSTR stock jumped higher, benefiting from a resurgence in the crypto space. As Barchart’s Elizabeth Volk mentioned, MicroStrategy represents a proxy play thanks to its ownership of blockchain assets. Moreover, MSTR benefits from a unanimous “Strong Buy” assessment among Wall Street analysts.
On the other hand, skeptics have also sounded the alarm. In particular, the growing availability of crypto-centric exchange-traded funds and other related derivative products effectively diminishes the proxy premium that MSTR stock currently commands. As well, MicroStrategy’s deployment of leverage — while attractive now — could end in tears later.
This last point is something that Barchart content partner Motley Fool has stressed. What’s happening is that for those who are interested in crypto assets, it’s economically more feasible to buy them directly rather than to pay what is effectively a fee for a derivative product.
“Although it's impossible to precisely pinpoint when a bubble will burst, the tea leaves couldn't be clearer that this premium, and MicroStrategy's use of leverage, isn't sustainable,” wrote Sean Williams.
So, should investors ultimately be bullish or bearish on MSTR stock? With a long iron condor, you can choose instead to play the volatility game.
Confusion in Direction, Clarity in Kinesis
As one of the more contentious ideas in the market, it’s difficult to say with any confidence where MSTR stock may head. Yes, as a crypto proxy, MicroStrategy may perform well if the underlying blockchain arena flourishes. However, the critics are also right: MSTR carries too rich a premium. Plus, there’s plenty of competing products.
However, with an implied volatility (IV) of almost 164% as of Friday — and a trending IV rank which suggests that the target security can be even wilder — it seems to be a solid wager that wherever MSTR stock goes, it will move with much fanfare. Assuming this, a long iron condor trade may be appropriate.
With such a strategy, the idea is simple: the speculator is hoping that the target security either rises above or falls below predefined profitability zones. The worst thing that could happen is if the security goes rangebound, neither moving much to the upside nor downside. In that case, the trader will lose the entire debit paid to enter the position.
As you might expect, long iron condors that don’t require much volatility — shallow wings, if you will — enjoy higher probabilities of success but offer lower payouts. Long condors that do require significant volatility are less likely to be successful but offer bigger payouts.
A quick and easy way to find a baseline trade is to use Barchart’s Expected Move calculator. For example, for the options chain expiring Dec. 13, Barchart estimates that MSTR stock may rise to $468.22 or drop to $306.72. A long iron condor that could be effective in either direction is the 310P | 340P || 430C | 460C. Should MSTR stock fall to $310 or rise to $460, the trader will receive the maximum payout of 32.16%.
That may not sound like much but Barchart estimates a 57.5% chance that this trade will be successful. Of course, you can modulate the wings of your condor as you see fit but remember: the greater the potential reward, the more risk you typically must absorb.
