PDD Underpriced Bullish Call Spread has Profit Potential of 67%

26 March 2024, 10:35 AM

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By Dmitry Pargamanik

How this PDD Bull Call Spread Works

The bottom of the PDD trade card shows us that we would buy one call and sell another with the same 19-Apr-24 expiration (this is a bull call spread as indicated on the top of the card).

Buy: 19-Apr-24 116 CALL

Sell: 19-Apr-24 119 CALL

Reasons to Like This Trade

  • You can buy this spread for $1.80 when theoretically it’s worth $1.99. Simply put, the market is implying a theoretical edge of 10.7%.
  • Your maximum gain is $1.20, which means you can make an astounding 66.7% return on your investment in 18 trading days! (That's if the stock closes at 119 or above. $1.20 / $1.80 = 66.7%) At the time of this alert, the stock was trading at 119.29.
  • The stock only needs to close at, or above, 119.00 after 18 trading days for you to realize this maximum return. Since the stock is already above your ideal price of 119.00, you have a cushion in the strategy. The stock can decline by -1.2% and you'll still break even. If the stock stays here or goes higher you will make your max gain.
  • 5 out of 7 indicators are pointing to a bullish sentiment in the stock, which is enough to believe there is a decent chance the stock price could hit its mark of 119.00. Look, nobody knows for sure if the stock is going to go up or down, but, if you had to handicap the stock price, these metrics are indicating that PDD is really riding the momentum of bullish signals.
    Metric Signal Bull or Bear
    Relative Performance 1-yr Outperform Bullish PDD Bullish Relative Performance 1 year
    Relative Performance 3-Mon Underperform Bearish
    Relative Performance 2-Wk Outperform Bullish PDD Bullish Relative Performance 2 Week
    Seasonality Strong Bullish PDD Bullish Seasonality
    Technical Bearish Crossover Bearish
    Historical Price Action 62% Uptrend Bullish PDD Bullish Historical Price Action
    Option Order Flow Sentiment Positive Net Option Delta Bullish PDD Bullish Option Order Flow Sentiment

Conclusion

This trade in PDD looks like a good opportunity because:

  1. 5 out of 7 bullish indicators support positive momentum
  2. 66.7% potential return on your investment
  3. Theoretical edge of 10.7%
  4. The stock price is already at the price point for you to make your max gain and can even go down by -1.2% and you'll still break even!

Don't Let an Opportunity Pass You By!


How to Find More PDD Bull Call Spread Strategies

How you can find bull call spread trade ideas for other stocks


And if you want to find more bull call spreads for other stocks, go to the bull call spread screener


Relative Performance

PDD has outperformed the market in the last year with a price return of +61.0% while the SPY ETF gained +33.5%. However, in the short term, PDD had mixed performance relative to the market. It has underperformed in the last 3 months, returning -17.6% vs +10.4% return in SPY. But in the last 2 weeks, PDD shares have fared better than the market returning +6.4% compared to SPY +2.3%.

Learn about a stocks relative strength


Seasonality: Strong

The strategy involves holding the position from Mar 26 to Apr 19 expiration. Historically, this has been a strong seasonal period. In the past 12 years, PDD shares have increased 60% of the time between Mar 26 to Apr 19, while averaging a return of +1.4%. Learn how to look up stock seasonality.

Technical: Bearish Crossover

The stock has been on an uptrend and the short term moving average (20day) made a bearish cross over. Can be the beginning of a trend reversal.

Historical Price Action: 62% Uptrend

In the last 4 years, there were 21 historical samples of PDD stock price movements over the same time period as this option spread. The stock moved up 62% of the time for an average return of +10.7%.

How to generate statistics on a stocks historical price return distribution

Option Order Flow Sentiment: Positive Net Option Delta

At the time of this PDD trade idea, bullish option order flow exceeded bearish option order flow. The net option delta volume was 103 K.

Learn more about option delta volume.

Find out the latest sentiment from the options market for PDD

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How to Screen for the Best Bull Call Spread


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Marketchameleon is a comprehensive financial research and analysis website specializing in stock and options markets. We leverage extensive data, models, and analytics to provide valuable insights into these markets. Our primary goal is to assist traders in identifying potential market developments and assessing potential risks and rewards.



NOTE: Stock and option trading involves risk that may not be suitable for all investors. Examples contained within this report are simulated and may have limitations. Average returns and occurrences are calculated from snapshots of market mid-point prices and were not actually executed, so they do not reflect actual trades, fees, or execution costs. This report is for informational purposes only, and is not intended to be a recommendation to buy or sell any security. Neither Market Chameleon nor any other party makes warranties regarding results from its usage. Past performance does not guarantee future results. Please consult a financial advisor before executing any trades. You can read more about option risks and characteristics at theocc.com.


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