Options Corner: Trump Media Might Rally As Political Wins Stack Up

With news breaking earlier this morning that the U.S. and China have finalized a trade understanding, the major equity indices bounced higher on Friday. However, Trump Media & Technology Group DJT suffered a conspicuous decline. While controversial in some circles because of its obvious ties to President Donald Trump, the media company's Truth Social platform will likely be relevant for at least the next three years. As such, DJT stock could be a compelling idea.

Undoubtedly, exposure to Trump Media is risky. Since the start of the year, DJT stock hemorrhaged about 49% of market value. Over the past 52 weeks, the security is down more than 52% at time of writing. However, it's also undeniable that DJT commands meme-like qualities. With the tremendous popularity of the Trump brand, the company that bears the president's name might not stay deflated indefinitely.

Whether one agrees with his politics or not, Trump has scored multiple victories. As stated earlier, his administration reached an agreement with Chinese diplomats. Among the key components of the trade agreement is China's commitment to supply rare earths, which represent critical commodities that undergird a wide array of products. Further, the negotiated terms indicate that there's a method to the madness, thereby instilling confidence in the president's leadership.

Another big win stemmed from U.S. forces striking key Iranian nuclear sites, which quickly led to a ceasefire between Iran and Israel. While the cessation of hostilities remains a fragile agreement, that the two sides have been willing to negotiate is nonetheless a massive political success for Trump. As the Cato Institute pointed out, Americans don't want to be dragged into another war in the Middle East. The use of force could have ended badly but didn't.

Even on the domestic front, Trump is winning. Just recently, The New York Times reported that the University of Virginia President James E. Ryan has stepped down due to pressure from the Trump administration. Through the resignation, the academic institution will be able to help resolve a Justice Department inquiry regarding its diversity, equity and inclusion initiatives.

With Trump being emboldened by his successes, he could potentially become even more aggressive with his policies, thereby providing fuel for Truth Social.

Making A Technical And Statistical Case For DJT Stock

While the fundamental narrative may be attractive for DJT stock, at the end of the day, investors must be willing to buy the security. From the perspective of technical analysis, it's possible that DJT has reached — or is close to reaching — a support level. Again, given its meme-like qualities, the market may perceive the red ink as a discount.

Still, the above represents a heuristic statement: DJT stock appears to have hit support because of the impact of an imaginary horizontal line. Technical analysts will often argue that support represents clusters of buy orders but the logic behind this is generally unsubstantiated.

Rather than assume the existence of buy orders — which is a presuppositional fallacy — I prefer empirically analyzing market demand. But in order to conduct such an analysis, the underlying dataset (the share price history of DJT stock) must speak a uniform language. As such, I convert the share price history into market breadth, which is the sequence of accumulative and distributive sessions.

At the moment, the price action of DJT stock can be converted as a "2-8-D" sequence: two up weeks, eight down weeks, with a negative trajectory across the 10-week period. Admittedly, this conversion process compresses DJT's magnitude dynamism into a simple binary code. However, binary codes are, by definition, discrete events, meaning that their boundaries are defined.

Scientifically, discrete events can be segregated into distinct categories, which can then serve as the basis for past analogs when conducting probabilistic analysis. With this framework, when the 2-8-D sequence flashes, the following week's price action has a 60% chance of upside, with a median return of 1.7%. Should the bulls maintain control of the market, DJT stock could see an 8.06% move in the second week.

A Tempting Offer On The Table

With the poor performance of DJT stock on Friday, market makers are in a giving mood. Subsequently, the 17.50/18.00 bull call spread expiring July 25 may represent a tempting idea. This transaction involves buying the $17.50 call and simultaneously selling the $18 call, for a net debit paid of $23 (the most that can be lost in the trade). Should DJT rise through the short strike price ($18) at expiration, the maximum reward is $27, a payout of over 117%.

This trade is enticing because you're given about four weeks for DJT stock to rise 4.4%. Based on past responses to the 2-8-D sequence, this is a realistic target. Further, as a baseline, the chance that DJT will rise over any given week is only 45.41%. However, past analogs demonstrate that investors historically buy the dips, making the current profile attractive.

Without converting continuous price signals into a binary code, I wouldn't be able to determine the probability of upside other than resorting to a trust-me-bro assertion. Combined with the fundamental speculation and the technical heuristics, the math seems to favor DJT stock. It's still a wildly risky wager but this way, you can gamble your "fun money" strategically and intelligently.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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