To say that Intuitive Machines (NASDAQ: LUNR) has struggled would be an understatement. Yes, the space economy is projected to be a multi-trillion-dollar sector over the next several years. It’s also true that LUNR stock has previously benefited from a historic contractual backlog of $1.8 billion, per Google Finance’s summary sheet.
Even with those datapoints, it’s impossible to ignore the overall contradiction in the technical domain.
Just pull up a standard price chart for Intuitive Machines stock. On a year-to-date basis, the ticker is down 14.54%, which initially might not sound too bad for such a speculative name. But look at the six-month trailing loss, which comes out to almost 27% in the red. Then look at the trailing month, which has succumbed nearly 32% below parity.
Conventional wisdom says to run far away from LUNR stock. While there might be a discount on the premise of mean reversion, unless this argument is demonstrated, it frankly appears like wishful thinking. Nevertheless, for those who want to take a capped-risk, capped-reward shot at LUNR, a vertical options spread expiring Oct. 23 could be interesting.
How so? There could be an unusual mispricing event.
Identifying the Opportunity in LUNR Stock (and the Risk)
What really caught my attention was the 14/15.50 bull call spread expiring Oct. 23, which is roughly six weeks out from the time of writing (Sep. 16). For a net debit (cash outlay) of $71, a speculator will be hoping for Intuitive Machines stock to trigger the $15.50 second-leg strike price at expiration. If so, the maximum profit would clock in at $79, a payout of over 111%.
From a nominal risk management perspective, I appreciate that I can slowly stagger my exposure. A few turns at $71 a pop isn’t the greatest expenditure in the world. Further, the way the spread is structured, the most that can be lost is the net debit paid per spread.
But beyond the surface-level risk that LUNR stock is historically a volatile entity is the actual probabilistic risk. Wall Street assigns a probability of breakeven at the $14.71 price point of only 41.2%. Worse yet, OptionCharts.io’s Probability Distribution screener indicates that the odds of LUNR triggering the $15.50 second-leg strike at expiration sit at only 30.62%.
You don’t have to run a formal expected value calculation to immediately see the dilemma facing debit-side options traders. At these probabilities, your portfolio would quickly sink as the number of losses (both full and partial) outpaces the number of wins.
In any other circumstance, financial experts would likely recommend you avoid this idea altogether. But this seemingly pessimistic conclusion is also where the opportunity rests for LUNR stock — and that’s because you don’t have to automatically accept the underlying presupposition.
It’s All Presuppositional, and That’s the Point for Forecasting Intuitive Machines Stock
While some entities in the financial publication space may believe that their indicators represent the gospel truth of the markets, nothing could be further from the actual truth. In reality, any argument made about the unknown future requires a presupposition to move the discussion forward.
And that’s the undeserved mythology of Wall Street’s probability distributions. Yeah, they may look “scientific” because you’re seeing bell curves and standard deviations. But cutting through all the nonsense, any forward-looking model is a presupposition.
Getting back to the aforementioned probabilities — 41.2% to break even, 30.62% to full profitability — these are derived from the Black-Scholes family of calculations. They’re useful because the calculations integrate implied volatility (IV), which itself derives from actual orders. However, the output of the formula presupposes that the target security will undergo a random walk between now and the expiration date.
If such a random walk occurred, then yes, those probabilities would accurately reflect reality. But it’s this presupposition that should be challenged. Because by necessity of the underlying math of Black-Scholes, the future is treated as an independent variable relative to the past.
None of us (to my knowledge) actually believes this. Fundamental analysts believe that past financial disclosures embed potential information about future trends. Technical analysts believe that past price patterns embed probabilities of future breakouts (or breakdowns). Quantitative analysts believe that conditioned trends found in past empirical data can create a composite picture of what may materialize tomorrow.
What’s the common thread? There’s a presupposition that the future is dependent on the past.
If that were the case — and I believe the data backs this up — it doesn’t make too much sense to rely on a random-walk model to help decipher LUNR stock. Let’s also keep in mind that Intuitive Machines has a 60-month beta of 1.85. Thus, it’s significantly more volatile than the benchmark S&P 500.
Combined, these factors would suggest that the future will not be random but would instead depend on past material events.
Filtering for the Identified Signal
So, from a quantitative perspective, what would be the material event that occurred that may influence the near-term future of Intuitive Machines stock? I would argue that its distinctively bearish order flow balance over the last 10 weeks — where LUNR has only managed to print three up weeks — represents a key signal.
During this time, the overall slope was downward. By discretizing price action as hard, binary categories, we can come up with a 3-7-D state classification, enabling us to look back in time to tabulate how many occurrences of this signal have materialized. As it turns out, there have been 20 occurrences (on a rolling basis) since the public market debut of LUNR stock.
Of this figure, the ticker has exceeded the equivalent of the $15.50 strike on week 6 (coinciding with the Oct. 23 expiration date) 14 times. Granted, the sample size is extremely small, leading to potential distortions. Still, as a simple statistic in the observed period, LUNR stock is currently running a projected 70% hit ratio for the 14/15.50 bull spread.
If that is indeed the case — and of course it’s a massive “if” due to the sample-size problem — there may be a serious mispricing of Intuitive Machines stock call spreads. Even if the exact projected probabilities are disputed, the observed reality is that this ticker historically enjoys a buy-the-dip rally following an extended downturn.
The major caveat is that an inductive inference cannot guarantee that prior trends will materialize as expected in the future. Still, if you have some “silly” money lying around, LUNR stock might not be a bad candidate to consider.
Finally, for a detailed, visual look at the process that undergirds my Markov chain analysis, you may watch my YouTube videos.
