Amid geopolitical flashpoints and economic uncertainties, investors may consider the relative safety of public utility Exelon Corp (EXC). So far this year, Exelon has outperformed the utilities sector, thanks to a strong return of nearly 15% since the January opener. Over the past 52 weeks, EXC stock has gained more than 22%.
At the same time, since late April, the security has been struggling for momentum, losing about 8%. Still, on a fundamental level, EXC stock commands significant relevance. Throughout much of the post-COVID-recovery period, a prevailing theme has been everyday consumers struggling to make ends meet. However, the cynical reality is that utilities represent a frontline service — you cut that off and you’re not getting far in this modern economy.
As such, EXC stock is likely to attract steady demand, irrespective of outside circumstances. It’s also possible that, based on the latest technical rumblings, the negative acceleration in EXC is fading. If so, a sentiment turnaround could be just over the horizon.
Following Monday’s closing bell, EXC stock represented one of the highlights in Barchart’s screener for unusual stock options volume. Specifically, total options volume reached 4,296 contracts, representing a 165.68% lift over the trailing one-month average. Further, call volume hit 3,720 contracts versus put volume of only 576, thus yielding a put/call ratio of 0.15.
On paper, the low ratio indicates more traders engaging call options than puts, implying bullish sentiment. A deeper dive into options flow — which focuses exclusively on big block transactions likely placed by institutional investors — revealed that net trade sentiment stood at $36,300 above parity, thus favoring the optimists. At least for EXC stock, the put/call ratio could be interpreted at face value.
Subsequently, the smart money may be bullish on Exelon, which could then attract retail buyers. However, the quantitative argument could be even more compelling.
Using Statistical Analysis to Chart a Path Forward for EXC Stock
At first glance, both the narrative and the unusual options activity point toward potential upside momentum for EXC stock. Still, the central challenge here is that for traders (especially options traders), these talking points lack specificity. Essentially, options expire so market participants can’t just rely on a thesis forecasting magnitude; the strategy must also take into account time.
In other words, options traders live in a world of probabilities, which inherently requires statistical analysis. Seemingly, this practice appears easy: just take the occurrences of the desired outcome divided by the total number of events in the underlying dataset. But this approach only calculates the odds of an outcome materializing across a dataset’s entire distribution, which is merely a derivative probability.
For traders, the most useful probability is the conditional variety — the odds of an outcome materializing across a specific data subset. Conditional probabilities are akin to calculating a baseball player’s situational batting average, such as when there are runners in scoring position (RISP). It’s a much more relevant insight than last season’s batting average, which is a derivative probability.
Now, the problem with applying conditional analyses in finance is the non-stationarity issue; basically, measurement metrics such as share price or valuation ratios change temporally and contextually. To impose stationarity on the dataset, an analyst can convert historical price data into market breadth — sequences of accumulative and distributive sessions. Market breadth, being a representation of demand, is a binary construct and therefore lends itself to categorization and quantification. These attributes later enable probabilistic projections.
In the case of EXC stock, the last two months’ price action can be characterized as a 3-7-D sequence: three up weeks, seven down weeks, with a net negative trajectory across the 10-week period. Admittedly, compressing price action into a binary code eliminates the magnitude dynamism of EXC. Nevertheless, the benefit is that past demand profiles can be categorized as behavioral states and their transitions from one state to another can be recorded.
Based on past empirical data, in 67.57% of cases when the 3-7-D flashes, the following week’s price action results in upside, with a median return of 2.21%. Should the bulls maintain control of the market, EXC stock could push above the $44 level over the next three to four weeks and possibly toward $45.
Aggressive Trades to Bet On
Based on the market intelligence above, arguably the most rational multi-leg options strategy is the 42/44 bull call spread expiring July 18. This transaction involves buying the $42 call and simultaneously selling the $44 call, for a net debit paid of $130. Should EXC stock rise through the short strike price ($44) at expiration, the maximum reward is $70, a payout of nearly 54%.
Those who want a much greater reward for higher probabilistic risk may consider the 44/45 bull spread also expiring July 18. In this case, the net debit is relatively cheap at $40. If EXC stock rises through the short strike price at expiration, the max reward is $60, a payout of 150%.
In either case, the driving force is the implied shift in sentiment regime of the 3-7-D sequence. As a baseline, the chance that a long position in EXC stock will be profitable over any given week is 52.37%. However, the aforementioned pattern — which historically acts as a reversal signal — dramatically boosts the odds in favor of the bullish speculator.
As a result, there’s an incentive to swing the bat — especially if you’re already prone to taking risks.
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.
