Extreme Speculators Should Keep Close Tabs on Intuitive Machines (LUNR) Stock

As exciting as the brand may be, Intuitive Machines (LUNR) comes with a hefty warning: LUNR stock is extremely risky. There’s simply no getting around this point. According to the Barchart Technical Opinion indicator, the ticker rates as a 56% Sell, with a continued possibility of LUNR maintaining its current trend.

Well, that’s not particularly a confidence-inspiring statement, considering that Intuitive Machines stock is down 11.51% in the trailing five sessions through Tuesday’s close. You can blame profit-taking and concerns about the company’s fundamentals. Yes, the record backlog expansion of $1.8 billion as of the end of the second quarter is very encouraging from a long-term view. However, rising operating costs (per Google Finance) raised concerns.

It just goes to show you that it’s difficult to trust high-volatility names, no matter how exciting the underlying business. LUNR stock features a 60-month beta of 1.83, which theoretically means that the equity is twice as volatile as the benchmark S&P 500. That’s going to give you strong gains when the security rips higher but the dips can be devastating.

Nevertheless, there’s a case for continuing to keep the faith with LUNR stock. For example, a recent defense contract win has underscored the reality that Intuitive Machines remains a compelling idea for forward-looking investors.

Of course, these factors have already been baked into the share price. Moving forward, there has to be another reason to consider Intuitive Machines stock — and that reason could be centered on order flow imbalances. Right now, LUNR is on track to print only two positive weekly candlesticks in the last 10 weekly sessions.

Sure, LUNR stock has a very short trading history and that lack of a sample size needs to be taken into account. However, prior appearances of the above quantitative sequence have typically resulted in a near-term upswing.

A Random-Walk Options Pricing Model May Not be Ideal for LUNR Stock

Because Intuitive Machines stock is so volatile given the high 60-month beta, the forward trajectory over the entirety of the next 10 weeks is difficult to pin down. Based on the historical data, it’s safe to assume that the journey will be extremely choppy.

Still, if we were to inductively infer where LUNR stock may land given the aforementioned 2-8-D signal (2 up, 8 down, downward slope), the 16.50/18.50 bull call spread expiring Sep. 18 would be considered an aggressive but plausible target. However, there’s a major problem: the breakeven price of $17.49 features a modest probability of profit of only 41.2%.

What’s worse, if you reverse engineer Barchart’s Expected Move calculator, the chance that LUNR stock will hit the $18.50 second-leg strike at expiration is only about 28.34%. If you were to run an expected value (EV) calculation on this trade, you would suffer negative EV because you would be projected to lose far more times than you would win — and the max payout of 102% isn’t going to make up the difference.

So, it raises the obvious question: why bother with Intuitive Machines stock at all? Frankly, most traders should probably avoid this name because of the extreme volatility.

However, the factor you must realize with the above probabilities is that they’re based on a random-walk framework. In other words, Wall Street’s options pricing models reflect the likelihood that LUNR stock will trigger specified thresholds assuming that it takes a random walk between now and the expiration date, with the current implied volatility (IV) providing the constant impetus.

This sanitary, risk-neutral environment is necessary for pricing standardization across all optionable securities but it raises presuppositional questions. For a high-beta play like LUNR stock, it’s difficult to assume that it will trade randomly.

Indeed, if we presuppose a nonrandom walk, the forecasted narrative takes an interesting twist.

Defending the Nonrandom Case for Intuitive Machines Stock

Why do I believe in nonrandom behavior? At this point, LUNR stock is quite an emotional ticker. We’re largely talking about the potential of the company and therefore, it’s reasonable to believe that order flow imbalances will trigger acute emotions like FOMO (fear of missing out).

Historically, we know that since its public market debut, Intuitive Machines stock has flashed the 2-8-D signal a total of nine times. It just so happens that at the approximate equivalent of the Sep. 18 expiration date, LUNR’s median endpoint forecast would be around $18. With some luck, the ticker may be able to clear the $18.50 mark.

If that turns out to be true, the Sep. 18 16.50/18.50 bull spread would make sense. Ultimately, you would roughly be looking at 50/50 odds, which isn’t great. However, it’s a lot better than 28.34%.

And that’s what it comes down to. Under a random framework, the smart move would simply be to avoid the 16.50/18.50 spread. However, under a nonrandom framework, there’s a not-super-silly case for considering Intuitive Machines stock.

No, it’s not going to be a safe bet, that’s for sure. But for a relatively modest net debit (cash outlay) of $99, it may be worth another look for extreme speculators.

On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.