Here’s Why Marvell (MRVL) Stock Call Options May Be on Discount for Bullish Speculators

Marvell MRVL -4.14% ▼ is a leading provider of semiconductor solutions powering modern data infrastructure and cloud computing. Unfortunately, in markets, positioning alone doesn’t always translate into positive performance, especially this year amid concerns about a brewing bubble in the tech sector. In particular, enterprises heavily geared toward artificial intelligence have faced upside sustainability concerns, leading to a rough start for MRVL stock. Through recent volatility, there may be two compelling reasons to consider being bullish on Marvell.

Claim 70% Off TipRanks Premium

• Unlock hedge fund-level data and powerful investing tools for smarter, sharper decisions

• Stay ahead of the market with the latest news and analysis and maximize your portfolio’s potential

First, while the smart money is pricing for risk mitigation, the manner and magnitude in which it’s doing so is not what I would consider overly aggressive or unusual. This setup suggests that volatility risk may not be too bad considering that sophisticated market participants aren’t anxious to protect themselves.

For example, Marvell is scheduled to release its fourth-quarter earnings report on March 5 after the close. While there’s a lot riding on this disclosure, the risk positioning for the March 6 weekly options chain is relatively muted. For future options chains in April, risk management remains modest, which may be a soft signal of returning confidence to MRVL stock. The second argument is quantitative. Recently, MRVL flashed a unique market signature that, in the past, has led to upside, and a similar scenario could play out over the next several weeks.

Volatility Skew as Key Intel for MRVL Stock

One of the most important indicators to consider within traditional options-related screeners is volatility skew. Definitionally, the skew identifies implied volatility (IV) — or a stock’s potential range of motion — across the strike price spectrum of a given options chain. To put this simply, the skew shows the surface-area distortion of volatility space, allowing retail traders to understand how the smart money is positioning risk.

What I’d like to focus on is the April 17 expiration date. Here, the volatility skew is relatively flat for the strikes near the spot price. However, on the left-hand boundaries (toward lower strikes), the skew swings upward. This setup suggests that smart money traders are paying a higher premium for protective puts, which act as mitigation against downside tail risk.

On the other end of the spectrum, the skew for the most part gently and slowly curves upward, especially for call IV. Taken as a whole, options traders are more concerned about not losing than they are about securing a big win. At the same time, the downside risk protection is being implemented in a controlled fashion — no one’s really panicking here.

To help triage this narrative, we can look at the volatility skew on the same date for the VanEck Semiconductor ETF SMH -3.77% ▼ . On a net basis, the main concern among the heavyweights that trade SMH is also to avoid big losses. Similar to MRVL stock, though, the skew shows a controlled risk-management posture.

With the prevailing theme being defensive, there’s a counterargument here that call options are cheap on a volatility basis. If we have a direct reason to buy Marvell stock, the semiconductor company could represent an intriguing opportunity.

Using an Inductive Model to Trade Marvell Stock

While the volatility skew showcases the smart money’s risk positioning, we still need a way to translate the underlying data into concrete price forecasts. As a basic reference, we can turn to the Black-Scholes-derived expected move calculator. For the April 17 expiration date, Wall Street’s standard model for pricing options gives a dispersion between $65.03 and $90.97.

Of course, the “problem” with the Black-Scholes formula is that it’s static, meaning that no matter what context the target security is in, you would apply the exact same formula. In other words, whether MRVL stock has just finished enjoying a massive rally or has simply collapsed, the expected move calculation remains the same.

I have a problem with this premise because we know that stocks generally operate under the Markov property; that is, the future state of a system depends solely on the current state. My argument is that MRVL stock is structured in a unique state. Therefore, if we are going to calculate forward probabilities, we must calculate them according to the condition in which the target security is in. That’s the heart of the inductive model.

Identifying a Specific Trading Idea

In the past 10 weeks, MRVL stock printed six up weeks and four down weeks, but with an overall downward slope. There’s nothing special about this 6-4-D sequence, per se (other than its unusual contrarian profile). However, this quantitative signal represents a specific behavioral state — and we would expect it to have a unique influence on MRVL.

Image showing standard and bimodal distributions for MRVL stock. Credit: Joshua Enomoto

Indeed, using data since January 2019, the average 10-week forward distribution of MRVL stock would likely place the security between $79 and $86. However, under 6-4-D conditions, the forward distribution would be expected to land between $60 and $110, with probability density being most prominent between $75 and $90.

Using a combination of enumerative induction and Bayesian-inspired inference, we can estimate that most of the probability mass associated with the 6-4-D quant signal would land north of the spot price over the next several weeks.

Image showing MRVL’s risk topography in three dimensions. Credit: Joshua Enomoto

Given the data and the pricing of MRVL call options, I’m tempted by the 80/85 bull call spread expiring April 17. This wager requires MRVL stock to rise through the $85 strike at expiration to trigger the maximum payout of 104%. Breakeven lands at $82.45, helping to improve the trade’s probabilistic credibility.

Wall Street’s Take on MRVL Stock

Turning to Wall Street, MRVL stock has a Moderate Buy consensus rating based on 19 Buys, six Holds, and zero Sell ratings. The average MRVL price target is $118.22, implying 52.52% upside potential.

The Takeaway: With the Smart Money Covering Risk, the Bull Trade for MRVL Stock Seems Cheap

Although Marvell has struggled for traction this year, the tech giant could provide a contrarian opportunity for aggressive traders. Because the smart money is more concerned about downside risk management, call options appear cheap on a volatility basis. Further, a unique quant signal may hold clues regarding possible upside, making MRVL stock an enticing idea.

Disclaimer & DisclosureReport an Issue