While the volatility of earnings season theoretically provides opportunity for options traders, there's also an ugly side to the narrative. Popular beverage company Celsius Holdings Inc (NASDAQ:CELH) recently demonstrated this component, delivering strong growth in its latest financial disclosure. Unfortunately, an incurred net loss overshadowed the print, sending CELH stock down sharply. Still, the red ink could potentially provide upside for aggressive market participants.
For the third quarter, Celsius generated revenue of $725.11 million, up 173% from the year-ago level. This latest tally also beat Wall Street analysts' consensus target of $717.69 million. According to management, the Alani Nu and Rockstar Energy deals, along with a 44% sales boost for its namesake brand, drove revenue.
On the bottom line, Celsius posted adjusted earnings of 42 cents per share, exceeding the consensus view of 28 cents. From the surface level, circumstances would seem rather auspicious for CELH stock. However, the company incurred a GAAP net loss of $61 million or 27 cents per share. The company attributed much of the loss to a distributor termination charge associated with moving Alani Nu's distribution to the PepsiCo (NASDAQ:PEP) system.
Despite the severe response impacting CELH stock, Goldman Sachs reiterated its Buy rating and $72 price target. Specifically, Celsius’s robust growth impressed the investment bank. Its U.S. energy drink market share is now at an "impressive" 20.8%.
What's more, on the quantitative front, there could be an asymmetric edge that daring options traders can exploit.
Celsius Stock: Ugliness Digested, Uncertainty Eliminated
One of the core reasons why many, if not most market professionals dislike volatile events such as earnings season is uncertainty. If trading is really about risk management, then a smart trader seeks to reduce uncertainty, not celebrate it. However, the good news about market-shifting events like earnings is that they bake the latest information into the share price.
Expressed differently, even though the response to CELH stock has been disastrous, the negative variable has likely been solidified into future expectations for Celsius. As such, it's easier to decipher a probabilistic path forward with this hurdle out of the way.
Using Russian axioms (Kolmogorov, Markov) on a dataset extending back to January 2019, the forward 10-week median returns of CELH stock can be represented as a distributive curve, with outcomes ranging between $41 and $51 (assuming an anchor price of $43.30). Further, price clustering would be expected to be predominant at around $45.80.
However, the quantitative argument is that CELH stock is not in a baseline or homeostatic state. Instead, the security is obviously in a highly distributive state due to the severe red ink. As such, the aforementioned probabilistic distribution may not be entirely relevant. Instead, a distribution needs to be calculated for the current behavioral state.
From this quantitative angle, CELH stock is structured in a 4-6-D formation: in the trailing 10 weeks, CELH has printed four up weeks and six down weeks, with an overall downward slope. Under this sequence, the distributional curve widens, with the risk tail dropping to around $38. However, the reward tail moves up to about $58.
Most importantly, there are two forecast zones where prices are most likely to cluster. Primary price clustering would likely occur at approximately $45, while secondary clustering may occur at $50. What's more, the exceedance ratio — or the probability that CELH stock rises above the anchor — tends to increase over time under 4-6-D conditions.
Subsequently, the secondary price clustering could be a more relevant target for bullish options traders, depending on the selected expiration date.
Identifying a Tempting Offer
Amid market chaos, the derivatives arena offers some tempting ideas. Arguably, the most tempting is the 42.50/47.50 bull call spread expiring Dec. 19. This transaction involves buying the $42.50 call and simultaneously selling the $47.50 call, for a net debit paid of $178 (the most that can be lost).
Should CELH stock rise through the second-leg strike ($47.50) at expiration, the maximum profit would be $322, representing a max payout of nearly 181%. What makes this trade attractive is the breakeven price, which lands at $44.28. As stated earlier, that's a contextually realistic target, whether from the perspective of the primary or secondary clustering zone.
More conservative traders may consider the 42.50/45 bull call spread expiring Dec. 19. While this trade is more probabilistically attainable as CELH stock only has to rise through $45, the max payout drops to around 100%.
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