The Saturday Spread: Navigating Unpredictability in a World Full of Unknowns (AMZN, CHWY, EXPE)

Understanding Information Transmission in Decision-Making

True information transfer occurs when the recipient updates their beliefs based on new insights. In this context, information can be classified as either degenerate or non-degenerate.

While these terms may carry specific connotations in finance, their distinction is rooted in the quality of information. A degenerate decision rule disregards the actual state and always leads to the same outcome, providing no meaningful guidance. Such rules, though technically valid, lack informational value.

Further Reading from Barchart

In contrast, non-degenerate rules incorporate structure, differentiation, and predictive accuracy, leading to measurable reductions in uncertainty. This excludes mere persuasion that lacks a factual basis.

Consider a scenario where you’re undecided about purchasing shares of a hypothetical company, ABC Semiconductor. If your decision is swayed solely by analysts’ positive opinions, you’re acting on degenerate information—relying on social proof rather than substantive analysis. Genuine non-degenerate information would involve new data about the company’s prospects, probability assessments, or conditional analysis that narrows down possible outcomes.

This article will explore three stocks that may be undervalued, using both foundational analytics and more advanced probability assessments to refine our investment outlook.

Amazon (AMZN): A Closer Look

Amazon has faced a challenging start to the year, with its stock price declining by 9%. Despite this, sophisticated investors remain interested, as indicated by volatility skew—a key analytic tool available to Barchart Premier members. This metric highlights implied volatility (IV) across various option strikes, offering insight into market sentiment.

For options expiring on March 20, the volatility skew reveals that call IV is higher than put IV at both ends of the strike range. This suggests that investors are more concerned about missing out on potential gains than about guarding against further losses. In essence, the market is positioning for possible upside surprises, even though technical indicators remain weak.

The Expected Move calculator estimates a price range between $194.94 and $225.71 for the same period. As traders, the goal is to refine this broad range. Here, the Markov property becomes relevant, indicating that future outcomes depend solely on the current state.

Over the past 10 weeks, Amazon has recorded only three weeks of gains, resulting in a downward trend. Using inductive reasoning and Bayesian analysis, projections suggest that AMZN will likely fluctuate between $200 and $230, with the highest probability near $212. The probability remains elevated up to $223 before tapering off.

Based on these insights, the 215/220 bull call spread expiring March 20 appears to be an attractive strategy.

Chewy (CHWY): Evaluating the Downturn

Chewy has also struggled, with its stock falling over 15% since January. Unlike Amazon, the volatility skew for Chewy indicates that investors are primarily focused on managing downside risk, though there may be room for a contrarian approach.

For the March 20 expiration, put IV is generally higher than call IV, especially at the extremes of the strike range. This reflects strong demand for protection against significant losses, while deep in-the-money puts may be used to hedge long positions.

Interestingly, call IV increases at far out-of-the-money strikes, hinting that the market sees a non-negligible chance of a sharp upward move. This nuanced skew suggests that the outlook isn’t purely defensive.

The Expected Move calculator, using a Black-Scholes model, forecasts a range between $24.88 and $31.16 for the March 20 expiration. To further narrow this, a second-order Markov analysis is applied.

Currently, Chewy’s price action fits a 3-7-D pattern, suggesting the stock could trade between $25 and $39 over the next 10 weeks, with the highest likelihood around $32.

Given these factors, the 30/32.50 bull call spread expiring March 20 is particularly appealing.

Expedia Group (EXPE): Potential for Recovery

Expedia Group completes our review of stocks that may be poised for a rebound. Although the Barchart Technical Opinion currently rates EXPE as a Weak Buy and the stock is down over 16% year-to-date, the volatility skew presents an interesting opportunity.

For the March 20 expiration, the skew shows that put IV is significantly higher than call IV at lower strikes, indicating that investors are prioritizing protection against sharp declines. However, at higher strikes, call IV surpasses put IV, suggesting that some market participants are preparing for a possible rally.

The Expected Move calculator, based on Black-Scholes, projects a price range between $207.55 and $266.15, a notable 12.37% spread from the current price. The aim is to convert this range of possibilities into a more focused probability estimate.

At present, EXPE’s price pattern fits a 4-6-D sequence, implying that shares could trade between $220 and $290 over the next 10 weeks, with the highest probability near $262.

With this in mind, the 250/260 bull call spread expiring March 20 could be a compelling choice for those seeking speculative opportunities.