Bold speculators interested in a quick strike may want to set their sights on healthcare specialist Teva Pharmaceutical Industries (TEVA). But rather than a long discussion on fundamental items that are essentially summaries of yesterday’s newspaper, I’d like to begin the discussion about TEVA stock with a thought experiment.
Imagine that you flip a (fair) coin 100 times every business day. What you flip on Monday would have no bearing on what you flip on Tuesday and so forth. Obviously, coin tosses represent random events. If your job was to determine the likelihood of a higher ratio of heads versus tails on Friday, knowing what the “score” was on the previous day would offer no useful intelligence.
Now imagine that the stock market is random. If investors were net buyers of a security on Monday, this fact would have no bearing on the stock’s performance on Tuesday. It would also mean that analysts could pull up historical price data and check the performance of the security across multiple time intervals. In a random ecosystem, the long-side success ratio for all these intervals would hover around 50%.
Instinctively, we understand that this null hypothesis isn’t valid: otherwise, why bother with the financial publication industry? The point of this sector is to decipher the statistical landscape of the security at hand and act only when the odds favor the speculator.
Over the past few months, I’ve personally drifted away from fundamental and technical analysis, in large part because these methodologies seek to extract forward probabilities based on vibes and stuff. Instead, we should extract the probabilities using math.
Leveraging Applied Game Theory to Decipher TEVA Stock
Applying statistical analysis on a publicly traded enterprise is conceptually a difficult concept because of the non-stationary problem. Essentially, the share price rarely stays localized in a narrow range. Instead, it moves, often wildly. For example, TEVA stock has more than doubled in value since late October 2023. This makes probabilistic analysis based on the use of past analogs rather challenging.
To get around this problem, we can apply discretization; that is, convert price action into discrete events. For this purpose, market breadth — or sequences of accumulative and distributive sessions — represents a viable solution. As a representation of demand, market breadth is effectively binary as investors are either net buyers or net sellers during a particular session. From here, individual market profiles can be segregated into distinct behavioral states.
If we convert TEVA stock’s historical price data (across 10-week intervals) since January 2019 into market breadth, we get the below summation:
Ticker |
L10 Category |
Sample Size |
Up Probability |
Baseline Probability |
Delta |
Median Return if Up |
TEVA |
1-9-D |
9 |
44.44% |
49.71% |
-5.27% |
7.66% |
TEVA |
2-8-D |
10 |
10.00% |
49.71% |
-39.71% |
3.05% |
TEVA |
3-7-D |
13 |
69.23% |
49.71% |
19.52% |
3.34% |
TEVA |
3-7-U |
1 |
0.00% |
49.71% |
-49.71% |
N/A |
TEVA |
4-6-D |
51 |
60.78% |
49.71% |
11.07% |
4.70% |
TEVA |
4-6-U |
19 |
52.63% |
49.71% |
2.92% |
3.94% |
TEVA |
5-5-D |
46 |
39.13% |
49.71% |
-10.58% |
2.62% |
TEVA |
5-5-U |
38 |
52.63% |
49.71% |
2.92% |
4.22% |
TEVA |
6-4-D |
13 |
53.85% |
49.71% |
4.14% |
3.21% |
TEVA |
6-4-U |
50 |
48.00% |
49.71% |
-1.71% |
3.52% |
TEVA |
7-3-D |
3 |
100.00% |
49.71% |
50.29% |
8.55% |
TEVA |
7-3-U |
21 |
47.62% |
49.71% |
-2.09% |
2.09% |
TEVA |
8-2-U |
16 |
56.25% |
49.71% |
6.54% |
1.77% |
TEVA |
9-1-U |
6 |
50.00% |
49.71% |
0.29% |
4.24% |
Currently, TEVA stock is printing a 4-6-D sequence: four up weeks, six down weeks, with a negative trajectory across the 10-week period. What’s significant about this sequence is that, in 60.78% of cases, the following week’s price action results in upside, with a median return of 4.7%.
While this statistical profile doesn’t guarantee upside success, what it does is establish guideposts to help the decision-making process. Traders may thus treat TEVA stock like a game of blackjack. Certain hands or sequences aren’t favorable to the bullish speculator so they may hold off. However, the 4-6-D sequence is statistically favorable, making a debit-based wager enticing.
Also, if the market were truly random, all these sequences would share roughly the same probability — around 50%. They don’t. Some sequences clearly favor long-side speculation, which is why TEVA stock is tempting.
Going for the Quick Strike
Using the market intelligence above, speculators who want to roll the dice may consider the 17/17.50 bull call spread expiring July 18. This transaction involves buying the $17 call and simultaneously selling the $17.50 call, for a net debit paid of $15 (the most that can be lost in the trade). Should TEVA stock rise through the short strike price ($17.50) at expiration, the maximum reward is $35 or a payout of over 233%.
Admittedly, this is a tight time window. For those who want an extra week, they may consider the 16.50/18 bull spread expiring July 25. However, the short strike price jumps from $17.50 to $18, which is almost a 3% difference. That’s something to keep in mind because it’s quite a steep price in exchange for the time cushion.
Either way, the probabilistic principle undergirding the above trades is this: as a baseline, TEVA stock has a slightly negative bias so the 4-6-U sequence incentivizes a bullish posture. Specifically, a random long position has a 49.56% chance of being profitable over a one-week period. However, the aforementioned sequence tilts the odds in favor of the bull, thus warranting consideration.
