Let’s not waste any time with this weekend alert: when the market opens next on Tuesday following President’s Day (officially Washington’s Birthday), you’ll want to keep close tabs on blockchain miner Riot Platforms (RIOT). Both technical and statistical evidence leans toward a bullish scenario, opening opportunities for both investors and speculators.

For the latter category, you have several options (pun intended). In particular, you’ll want to brush up on a multi-leg strategy known as a bull call spread. This transaction involves buying a call option and simultaneously selling a call at a higher strike price (for the same expiration date). The idea is to use the credit received from the short call to partially offset the debit paid for the long call.

For Barchart readers who quickly want the actionable idea, my statistical model — which I refer to as the Probability Gambit — identifies $13.97 as a potential price target for the options chain expiring Feb. 28 (two weeks from now).
However, taking stock of what the market makers are giving in terms of premium pricing, there appears to be a favorable pricing inefficiency which retail traders could exploit. In other words, I am casting doubts on the low probabilities of success that market makers are assigning a specific high-payout bull spread, thus empowering this favorable inefficiency.

Want to know what this trade is? Let’s go on a journey together.

Technical and Fundamental Elements Shine Brightly for RIOT Stock

In the first order of business, we’ll look at the standard arguments for a long speculative position in RIOT stock. From the discipline of technical analysis, RIOT appears to have formed a bullish pennant formation. It’s possible that a “flagpole” materialized in September last year and from November onward, the price action has formed the consolidation cycle undergirding the pennant shape.

Granted, I’m not the biggest proponent of technical analysis as the field is subject to the no-true-Scotsman fallacy. In other words, if a particular technical pattern fails to yield the desired outcome, the ready explanation was that the pattern wasn’t authentic. The lack of empiricism makes this approach rather frustrating for all involved.

However, it should be noted that MicroStrategy (MSTR) stock also appears to be charting a bullish pennant formation. With two cryptocurrency-focused enterprises charting the same pattern at the same time, it lends credence to the possibility of a breakout move.

Even better, RIOT stock — along with the underlying crypto ecosystem itself — arguably enjoys strong fundamental support. As you’re probably aware, inflation has soared above economists’ expectations. It’s one of the reasons why gold has performed so well in the past few months: investors are attempting to protect their wealth through the safe haven of precious metals.

However, as Barchart contributor Motley Fool pointed out, crypto skews young. Now, we can get into the specific demographics but the main takeaway is that young people are more likely to treat blockchain-derived coins and tokens as safe-haven alternatives.

It’s quite possible, then, that cryptos will swing higher, which should be net positive for RIOT stock. Coincidentally, it just so happens that there’s a bullish pennant forming as this fundamental narrative is playing out.

Statistical Evidence Points to Imminent Upside

One of the more convincing arguments in my opinion, though, is the statistical one. At first glance, the statistical case seems suspect. After all, from a stochastic or temporal view of the past five years’ worth of price data, a position entered into RIOT stock at the beginning of the week has a 48.68% chance of rising by the end of it. Over a four-week period, the long odds conspicuously climb to 50.95%.

Still, 51% long odds don’t provide enough of a margin of safety. Therefore, market makers take this data and are pricing option premiums accordingly. But the problem with standard risk modeling centers on its static nature. For example, typical methodologies like Monte Carlo simulations and Black-Scholes (for European-style options) fall under three potential flaws:

• Assumption of the probability of an event being static or stationary.
• Framing volatility as a circumstance that reverts to the mean over time (thus leading to a more linear or normal distribution).
• Structuring past returns as independent of future returns (thus ignoring momentum after extreme fluctuations of the fear-greed continuum).

With the Probability Gambit, I am forwarding the thesis that past events do have an impact on forward momentum. In the case of RIOT stock, modest weekly returns tend to generate FOMO or the fear of missing out.

In the week just concluded, RIOT gained 4.6%. Whenever the security gains up to 5% in a one-week period, the subsequent week’s long odds jump to 62.16%. Over the subsequent four weeks, the long odds are still positive at 54.05%.

As mentioned earlier, assuming the bullish scenario plays out, RIOT stock could hit $13.97 by the options chain expiring Feb. 28. However, an intriguing idea would be the 13/13.50 bull call spread. Here, RIOT only needs to reach $13.50 or above to trigger the maximum payout, which stood at 177.78%.

The market maker is assuming a low probability of profit of 33.5%. However, based on dynamic conditions — rather than static — I believe the probability is above 50% and more closer to 60% (if not higher due to the lower target of $13.50 as opposed to $13.97).

Check the Inside Baseball Before You Go

Barchart Premier members get access to valuable information for a very reasonable price. One critical dataset is the Options Overview History, which showcases the implied volatility trend or the market’s expectation of future price movements.

Currently, the IV Rank and IV Percentile are both at low levels, which gives credence to the bullish pennant narrative mentioned earlier. With the price action stuck in a consolidation cycle, traders aren’t expecting a big move. This framework also explains why the market makers are so generous with their $13.50-second-leg bull spreads: they’re not expecting a big move.

However, the crypto market is wildly dynamic. Once momentum picks up, it could be off to the races.