In the sport of baseball, one of the most commonly cited statistics is the batting average, usually framed over an entire season. Though somewhat informative, it doesn’t provide much of an advantage. Instead, managers want to know situational statistics, such as batting average when there are runners in scoring position (RISP). The philosophy of course is that great players rise to the occasion.

It’s a similar story on Wall Street. Let’s take a look at blockchain miner CleanSpark (CLSK) as an example. Over the past five years, CLSK stock gained over 81% of equity value. However, this statistic alone doesn’t capture all the gyrations that occurred during this period. By the capricious nature of good or bad timing, investors may either love CleanSpark or absolutely hate it.

Interestingly, on any given week over the past five years, the chances that CLSK will end on a positive note clocks in at only 47.7%. From a weekly performance perspective, CleanSpark suffers from a slightly negative bias — worse than coin-toss odds. This baseline probability is calculated by taking the number of positive return weeks — which is available to Barchart Premier members through the Historical Data section — divided by the total number of weeks in the dataset (i.e. trailing five years).

Mathematically, this process aligns with a frequentist approach. On average, when CLSK ends as a positive return, investors gain just under 14%. On the down weeks, they average losses of 10.96%. While the frequentist method offers some useful data, it doesn’t take into account how extreme circumstances impact the fear-greed continuum.

On the other end of the scale, market makers — who are essentially taking opposite-side wagers — deploy a combination of frequentist and Bayesian methodologies to arrive at estimated projections of price movements. However, the Bayesian element algins with stochastic models rooted in the random walk theory.

The idea is that new information is used to update pricing expectations. However, the flaw is that common models like Black-Scholes or binomial trees don’t readily account for situational anomalies like volatility clustering or sudden seismic shifts. That’s where dynamic, event-based probability analyses come into play.

Accounting for ‘RISP’ in CLSK Stock

For the business week ended Dec. 27, CLSK stock suffered a loss of just under 12%. Looking at the past 261 weeks (not including the week just concluded), there have been 70 instances where CLSK suffered a double-digit loss. Of this tally, 36 subsequent weeks (or 51.43%) ended with a non-zero positive return, 32 weeks suffered a loss and two weeks saw a flat return.

In other words, when a large drop occurs in CLSK stock, contrarian investors are barely willing to buy the dip. Again, under everyday normal circumstances, there’s roughly a 48% chance that between Monday’s opener and Friday’s close, the blockchain miner will end the week in the black. Certainly, the context of extreme volatility incentivizes the bulls but not by much.

If you were to take a directional wager on CLSK, it may not be the smartest move. Even with an oversold indication, the chances that the bulls would dive in are only minimally above a coin toss. In baseball terms, the presence of RISP hardly improves CleanSpark’s batting average.

However, this Bayesian calculation reveals that on the positive response weeks following a double-digit loss, the average return lands at 15.66%. For negative response weeks, the average loss sits at 11.29%. It’s a slight form of volatility kinesis but the conclusion is quite clear: immediately following a deep bout of red ink, both the upside and downside movements become more intense, even if their frequencies don’t change much.

Given this framework, speculators may be better served considering a long iron condor for CLSK stock. A combination of a bull call spread and bear put spread, the long iron condor aims for significant volatility. So long as the target security hits the uppermost strike price (the bull call’s short strike) or falls to the lowermost strike price (the bear put’s short strike), the trader collects the maximum payout.

Simplifying the Condor Selection Process

To be honest, condor strategies tend to be intimidating due to the four legs involved (two legs per each vertical spread). For some securities, it’s not unusual to see hundreds of potentially viable iron condors for a particular options chain. Naturally, the unaccustomed investor can find the process of discovering the best condor to be frustrating.

Fortunately, with the dynamic probability analysis — the calculation of RISP in the above baseball analogy — it’s much easier to decipher the most compelling long iron condors. By applying the average return following a weekly double-digit loss to the current market price, we can estimate the following Friday’s potential price range. For CLSK stock, the spectrum comes out to $8.68 on the downside and $11.31 on the upside.

From here, Barchart Premier members can target the best fit in the context of their risk tolerance. For the options chain expiring Jan. 3 (this coming Friday), the 9.00P | 9.50P || 10.50C | 11.00C long iron condor — or more simply the 9.00/9.50 bear put spread and the 10.50/11.00 bull call spread — appears very enticing. Not only are the bull and bear short strike targets within a contextually feasible range, the upper and lower breakeven thresholds come in at $10.79 and $9.21, respectively.

What’s really stunning in my opinion is what the market makers were willing to give during the Dec. 27 session. For putting $29 at risk, the trader has the opportunity to earn $21 or a payout of 72%. Such a robust reward indicates a common assumption that this trade has relatively low odds of success.

However, my assertion is that this calculation is based largely on the random walk theory and doesn’t take into account the situational context. Essentially, these stats are updated seasonal batting averages. We’re looking instead for RISP-adjusted batting averages.

With two mathematical models at odds with each other, somebody’s going to be right and somebody’s going to be wrong. The argument here is that market makers are generously pricing CLSK long iron condors in your favor. At the very least, this is a trade to monitor closely next week.