No matter what I’m about to say next, you really ought to avoid Opendoor Technologies (NASDAQ: OPEN). Upon its introduction in the public equities arena, OPEN stock attracted massive speculative attention thanks to the underlying iBuyer business model. With COVID-19 being all the rage (for all the wrong reasons), there was a clear incentive for limited-contact, limited-friction real estate services.
While that may have initially resulted in a huge uptick in demand for OPEN stock, the narrative quickly imploded, first because of the fading pandemic and later because of shifting economic realities. A blistering hot housing market captured early dollars, but the ability to sustain the drive petered out — as these things generally do.
What turned out to be one of the more promising tech-centric plays became a penny stock. Right now, Opendoor stock can be bought for a two-dollar bill and some change — and given the relative rarity of two-dollar bills, many investors reasonably assume that holding onto that specific piece of currency is a more efficient use of capital than OPEN shares.
On top of all this, the economy continues to be a mess and real estate ownership is becoming increasingly unaffordable, especially for those in the first-time buyer demographic. Just about the only positive fundamental catalyst is that OPEN stock might benefit from reduced housing prices thanks to rising interest rates.
Still, that potential discount won’t come for free, as it would also mean that borrowing costs will rise. Obviously, that doesn’t present a compelling case for names directly related to real estate sales, thus explaining the 62% loss of value of OPEN stock on a year-to-date basis.
However, these technicalities might not matter to near-term options traders, who are primarily focused on perceived value rather than intrinsic value. Further, because the price may be right in the options market, Opendoor stock may not be as irrational as it may first appear.
A Massive Payout Forces a Rethink for OPEN Stock
On the whole, I want to make it categorically clear that Opendoor stock is truly irrational — if by rationality you mean a reliable, high-probability candidate for upside. Never say never, I suppose, but I for the life of me cannot see a viable reason why Opendoor’s label will change from extremely speculative to something more respectable.
It’s a penny stock, and I think it will stay a penny stock for a long time. That said, if Opendoor can go from one threshold of the category to a higher one, you could profit handsomely nonetheless. Ultimately, that would be the goal.
At the time of writing, the 3/4 bull call spread expiring Nov. 20 presents a wildly asymmetric reward structure. For risking a net debit (cash outlay) of $6, the maximum profit should the stock rise through and trigger the $4 second-leg strike on expiration clocks in at a gargantuan $94. This ratio translates to a payout of 1,566.67%.
Of course, the flipside to this argument is that there are no free lunches offered on Wall Street. In exchange for this massive potential reward, you’re looking at a measly probability of profit (breakeven) of only 11.8%. That would be to break even at a price of $3.06 on expiration.
According to OptionCharts.io’s Probability Distribution screener, the odds of Opendoor stock actually hitting $4 on Nov. 20 sit at only 4.31%. Out of 100 spins of the wheel, you should only expect to hit it big a little over four times.
Intuitively, this setup doesn’t seem favorable for OPEN stock, but there’s an important nuance to consider.
Running an Expected Value Calculation for Opendoor Stock
Going over to OddsJam.com, we can calculate the expected value (EV) of the above trade for OPEN stock given the aforementioned parameters. For the 3/4 bull spread, the wager would be $6, the American-style odds would be the payout of 1,566.67%, and the win probability would be 4.31%. Plugging these figures in, we would get a negative expectancy of $1.69.
That’s not the worst outcome straight out of the gates.
Nevertheless, there may be a chance that the probabilities for Opendoor stock are somewhat understated. Keep in mind that the previously generated probabilities stem from the Black-Scholes formula, which presupposes that the target security undergoes a random walk.
That’s quite a startling premise if we consider that, again, OPEN stock lost 62% of market value on a year-to-date basis. If anything, we would expect this severe pessimism to sharply influence the perception of OPEN — and based on this perception, it may influence the security’s forward trajectory.
After all, we’re no longer dealing with a high-ticket item; instead, Opendoor stock is one of the nominally cheapest names that commands popularity among retail traders. There’s always a chance that the market could view OPEN as a once-in-a-blue-moon discount and bid it up, if only temporarily.
With the share price this low, OPEN stock could really move — and that leads to an interesting storyline.
An Ultra-Rare Quant Signal Flashes
In the last two months, Opendoor stock printed 10 weekly candlesticks — and the crazy thing is, nine of them were in the red. Significantly, the only time we saw nine negative candlesticks over a 10-week period was sometime in 2023. With a sample size of n=1, there is no statistical case I can make here.
Still, what I find extremely interesting is that, during this one time this extremely bearish state flashed on the technical chart, OPEN stock managed to swing up roughly 94% over a six-week period. If this move were to be replicated beginning on Monday (and assuming a share price of approximately $2.22), OPEN would easily clear the $4 strike on Nov. 20.
Of course, no one — and I do mean absolutely no one — should just bet it all on Opendoor stock. Even in the best-case scenario, where we extract the forward probabilities of OPEN using an aggregate baseline of all 10-week rolling sequences going back over the past five years, the best probability I can come up with is 5.7% to hit $4 on expiration.
It would take a 6% probability for the 3/4 bull spread as it stands to deliver a 0% EV. So, we’re still talking about an ultra-low-probability trade.
What may change the discussion is that extreme bearishness has once triggered a massive contrarian move, perhaps due to a short squeeze. And yes, Opendoor’s short interest of float at 24.17% is very high indeed.
If history does repeat itself, OPEN stock may be a monster of a speculative trade.
