With the technology sector continuing its decline — exacerbated by a steep correction in the cryptocurrency market along with fears of overexuberance toward artificial intelligence — several innovation-adjacent names like Vistra Corp (NYSE:VST) suffered. On paper, Vistra isn't directly related to tech. However, it provides the electrical power that no digital solution can live without. Subsequently, as demand falters, so too does the premium tied to power.
While such a correlation may make logical sense on the surface, investors should keep in mind that AI demand as it relates to power is nonlinear. Specifically, as AI deployment grows, electricity demand doesn't just rise in a smooth, ascending line. Instead, the consumption materializes in abrupt spikes. In other words, a single cluster of AI-focused graphics processing units (GPUs) represents a massive surge in power use, perhaps the equivalent of a small town.
What's more, nonlinearity means that this power consumption is locked in. Essentially, a completed AI facility becomes a multi-decade power customer. Plus, the operational nuance of data centers represents a cynically bullish catalyst for VST stock. Unlike personal computers, AI clusters can't idle in the same manner. They must run 24/7, irrespective of workload.
Given the tremendous consumption of these entities, it's not uncommon for utilities to turn data centers away if they don't have adequate power available. That's the power behind VST stock. It's not just about providing power. Vistra is one of the few companies that are able to at least be in the discussion of addressing the resource bottleneck that currently plagues AI.
VST Statistically Enjoys Comeback Potential
While making a narrative-based argument for VST stock provides important context, it's not particularly helpful for trading endeavors, especially when dealing with the constraints of options. Part of the flaw behind fundamental (and technical) analysis is that the practitioner takes a single journey of the target equity across time and crafts a story behind it.
Maybe the story is accurate or maybe it's not; unfortunately, the insight can only occur ex post or after the fact. Fortunately, there's a more empirical mechanism to understand a security's tendencies and that's quantitative analysis.
At the core, the quant approach is the study of price action to make rational trading and investing decisions. More specifically, it treats price behaviors as a discretized probability space with real outcomes and distributions. While individual quant models are proprietary, most are probably using a Kolmogorov-Markov framework layered with kernel density estimations (KM-KDE).
In my version, I pivot away from treating price as a singular journey but segment it as hundreds (if not thousands) of trials across a given interval. While no one trial is going to be identical to another, over enough trials, a pattern will likely emerge, with prices tending to cluster around a particular zone. What's more, trials associated with specific market signals may yield different clusters.
If there is a variance between the clusters, this delta could potentially represent an informational arbitrage that can be exploited — especially because no one to my knowledge in the financial publication realm run Markovian analyses. It's a twofold problem as run-of-the-mill spreadsheets can't handle the math and the foundational text on Markov isn’t written in English.
Using the above KM-KDE approach, the forward 10-week median return of VST stock can be arranged as a distributional curve, with prices ranging roughly between $172 and $188 (assuming an anchor price of $175). Price clustering would likely be predominant at $181.50.
The above assessment aggregates all sequences since January 2019. However, we're not interested in the performance of all trials but rather a specific trial: price action that follows a 3-7-D sequence. In other words, in the trailing 10 weeks, VST stock printed three up weeks, seven down weeks, with an overall downward slope.
Under the above condition, the forward 10-week outcomes shift positively to between roughly $180 and $205. Most importantly, price clustering would occur near $190. This gap to the baseline cluster translates to a 4.68% informational arbitrage.
Following The Data To A Trade
One of the things that I love about quantitative analysis is that we let the data guide our trading decision rather than to presume one based on our emotions and/or biases. Given that we "know" — assuming the validity of the quant model assessment above, which could be wrong, to be fair — VST stock tends to cluster around $190, the 185/190 bull call spread stands out.
This trade requires two simultaneous transactions: buy the $185 call and sell the $190 call, for a net debit paid of $225 (which is the most that can be lost). Virtually every broker should provide a single-ticket vertical spread order, which means you don't have to manually buy one leg and separately sell the other. Instead, you buy the spread as a combined, single execution.
If VST stock rises above the second-leg strike ($190) at expiration, the maximum profit is $275, a payout of over 122%. Now, the breakeven is $187.25, which is very close to the upper strike. Usually, that's not ideal because it doesn't give you much margin for error.
But because we believe VST stock will cluster near $190 under 3-7-D conditions, we're willing to take the narrow bet. That's another element of the quant approach that provides an uncommon edge.
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