Let’s just be real: an investment in MicroStrategy (MSTR) is basically a proxy for the cryptocurrency market. So, why not just put money in cryptos directly? As regulatory developments have demonstrated, betting on this market carries unique structural risks beyond the usual ebb and flow of fear and greed. Bidding up MSTR stock helps mitigate some of these concerns.
By no means am I endorsing cryptos or their proxies: I’m just explaining the possible incentive behind MicroStrategy. Beyond the regulatory environment, digital assets can fall prey to hacks, scams and even lost passwords. Of course, there are administrative risk factors involved in equities like MSTR stock. Still, investors may sleep easier betting on an actual company than a blockchain asset.
Now, with cryptos having performed well this year, MSTR stock has been one of the must-have securities among market gamblers. Since the start of the year, the company has gained 242% in equity value. Nevertheless, with such robust enthusiasm, it’s fair to wonder if most of the bullishness has been priced in.
Two factors may add a wrinkle to this concern. First, MicroStrategy will disclose its latest earnings report this coming Wednesday. Any bit of good news — combined with already-strong support for cryptos — may send MSTR stock flying higher.
Second, the average implied volatility (IV) for the company’s options chain stands at 102.6%, indicating tremendous projected kinesis. Should traders bet correctly, they could see substantial rewards in a short period of time.
Leveraging Unusual Options of MSTR Stock to Your Favor
According to Barchart’s screener for unusual options activity on Friday, MSTR stock represented one of the highlights. Specifically, the $255 call expiring Nov. 1 (this Friday) saw volume reach 17,587 contracts. Notably, open interest at the time sat at a mere 471 contracts. This dynamic indicates extreme demand for this particular strike.
What’s even more intriguing is the options flow data, which filters exclusively for big block transactions likely placed by institutional or professional investors. Following Friday’s close, the $255 call reached a transaction size of 15,850 contracts. That means over 90% of demand for this particular option hailed from institutional players.
At this moment, the temptation is to buy the $255 call; after all, joining the smart money could be a prudent decision. However, it might be even wiser to consider selling this call as part of a bull call spread. With the credit earned from the sale of this option, we can use it offset some of the debit of a lower-priced call.
Effectively, we would be giving ourselves a discount in a call option. And while the spread inherently caps our upside reward, there are two elements to consider. Number one, the threshold to profitability is lowered because of the spread. Number two, the time to expiration is very short so capping upside potential isn’t nearly as bad of a penalty as it initially sounds.
Most importantly under the context of unusual options activity, the massive demand associated with the $255 call suggests that the price we’ll get for selling it is much higher than it normally would be. So, if we’re going to engage a call spread, involving the hottest call in the market could be quite prudent.
Using Some Quick Math to Place a Bet
Of the available bull call spreads with a $255 short (sold) leg, most of them require a significant amount of capital. For example, the most expensive spread — the 200C/255C — requires a net debit of $3,245. Yes, the breakeven price ($232.45) is below Friday’s closing price of $234.34. Still, that’s a ton of money that could evaporate if the trade goes sour.
On the other hand, the cheapest spread of 252.50C/255C only costs $100 for the chance to earn $150. That sounds appealing but the breakeven threshold is $253.50. That’s up about 8.2% from Friday’s close. Is that too risky of a bet?
Based on stochastic analysis, maybe not. For the Nov. 1 options chain, the IV stands at 93.3%. Multiplying this figure by the current share price and the time decay adjustment (the square root of the days left to expiration divided by 365 days) gives us a product of $29.53. If we’re assuming a bullish trajectory, the market believes MSTR stock could hit up to $263.87 following earnings.
To be sure, projections — whether established by IV or by some other mechanism — can always be wrong. However, the market anticipates a non-zero probability of there being enough gas in the tank for MSTR stock to exceed the $255 short leg. So, grabbing the cheapest of these condors might not be as silly as it looks.
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.
