While Airbnb Inc (NASDAQ:ABNB) CEO Brian Chesky may rank among the world's richest people, that status took a bit of a beating recently. Much of his net worth — standing at around $10 billion — is largely tied to his stake in ABNB stock. Of course, the equity took a hit recently, declining about 8% in the trailing month. Nevertheless, underlying sentiment may have received a critical lifeline.
Specifically, JP Morgan and Goldman Sachs have realigned their interest rate outlooks, with the financial giants now forecasting the Federal Reserve will deliver a quarter-point cut after its Dec. 9-10 meeting. What's more, traders are now pricing in a probability of 84.7% that the central bank will go through with the accommodative move. This is essentially a 180 within a matter of days, when the odds of a rate cut were as low as 25%.
Fundamentally, reduced cost of borrowing should filter across the economy. It's not just about the relief that individual consumers will feel. Enterprises will have more motivation to engage in growth-related ventures and other corporate investments due to the implied erosion of dollar value over time. In theory, business activity should improve — all other things being equal — eventually leading to more discretionary spending.
Of course, not all things are equal, with the economy and soft jobs market facing significant challenges. As if to emphasize the point, options sentiment in the near term has appeared poor. However, with the latest monetary policy pivot — or at least the anticipation of such — we're looking for a quick reversal in ABNB stock.
Given its statistical trajectory following extended periods of downturn, Airbnb could present a contrarian opportunity.
Leveraging Probability Density To Trade ABNB Stock Options
While no one really knows whether the Fed's potential dovish stance will help engineer a substantive economic recovery, in the options business, the question tends to be a moot point. Generally speaking, when we're talking about options trading — such as the use of vertical spreads — we're aiming to lever up potential rewards over a short period of time.
Since we're not looking that far ahead, we don't need Nostradamus-like prescience. Instead, we need to calculate probability density, a concept that refers to the tendency of a stock to cluster at certain price levels.
To generate such an advanced statistic, we need to engage in reification and iteration. First, we treat probability not as an abstract concept but as a physical object. In this manner, we can use non-linear math and algorithms to determine where the support beam or stud is located. The idea is that we peg our profitability triggers on areas where probabilistic support is strongest (i.e. where prices tend to cluster).
However, reification in the equities market doesn't come naturally since a security represents a singular journey across time. Therefore, we need to implement iteration — breaking apart price action into segments. The idea is that, over many trials, patterns (densities) will appear. Moreover, different patterns may materialize from different market stimuli.
Essentially, by finding the difference between the probability density that the market expects versus what may actually happen based on the current signal, we can potentially uncover an informational arbitrage.
Under aggregate or baseline conditions, ABNB stock over the next 10 weeks would be expected to mostly range between $115.50 and $119 (assuming an anchor price of $117.46). Price clustering would be expected to occur at about $117.25.
However, in the trailing 10 weeks, ABNB stock has been operating under a distributive 4-6-D formation: four up weeks and six down weeks, with an overall downward slope. Under this specific setup, the forward 10-week returns would likely range between $111 and $139, with price clustering predominant at $127.
With an 8.32% positive variance between the two distributions, this is a sizable informational arbitrage.
Taking What The Market Is Willing to Give
Although it's impossible to say with absolute certainty what the market is thinking, it seems rather obvious that the underlying liquidity providers view the bullish case for ABNB stock with skepticism. As such, I think the most compelling idea at this moment is the 120/125 bull call spread expiring Jan. 16, 2026.
The above trade involves two simultaneous transactions: buy the $120 call and sell the $125 call, for a net debit paid of $209 (the most that can be lost). Should ABNB stock rise through the second-leg strike ($125) at expiration, the maximum profit clocks in at $291, a payout of over 139%. Breakeven comes in at $122.09, which should be a contextually realistic target.
Those who really want to try their luck may consider the 125/130 bull spread, also expiring Jan. 16. It's ambitious because of the $130 higher-leg strike. However, this is still near the meat of the probabilistic curve. As well, the breakeven price lands at $126.25.
Most temptingly, the max payout stands at a robust 300%. Again, it's super-risky but it's also something to think about.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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