EV Maker Xpeng Just Flashed A Potential Reversal Signal Ahead Of Earnings – XPeng (NYSE:XPEV)

For options traders, earnings arguably represent the ultimate wild card — and we’re going to find out just how wild circumstances can be with Chinese electric-vehicle manufacturer Xpeng Inc XPEV. In many ways, quarterly financial disclosures are binary. The market will either respond well to the figures and guidance or they will not. It’s not always clear what will move investors, which makes the process agonizing but simultaneously enticing.

Here’s what we know. Heading into the second-quarter disclosure — which will occur on Tuesday before the opening bell — analysts anticipate a loss per share of $1.23 on revenue of $18.58 billion. In the year-ago quarter, Xpeng posted a loss per share of 18 cents on revenue of $1.12 billion. At that time, the company met the “profitability” target but slipped 1.24% against the sales target.

Still, what’s intriguing is that, despite the revenue miss, XPEV stock quickly marched higher after some digestion of the news. This proves that the raw numbers aren’t always everything when it comes to post-earnings performances.

Nevertheless, there’s genuine reason for optimism based on the fundamentals. For the month of June, Xpeng recorded a 224% year-over-year increase in deliveries. At the time, this marked the eighth consecutive month where Xpeng delivered more than 30,000 units. Even better, the company followed up that achievement with a new record monthly deliveries metric of 36,717 in July. This represented a year-over-year lift of 229%.

No, I don’t think we should outright ignore the challenges facing the slowing momentum in the Chinese economy. But Xpeng is undeniably bringing home positive data to investors ahead of a critical disclosure. Therefore, enthusiasm for XPEV stock appears justified.

Calculating Statistical Meaning from the Fundamental Data of XPEV Stock

While the narrative for Xpeng may be robustly bullish just ahead of earnings, the common presupposition is that the market has somehow failed to account for this news. Therefore, XPEV stock may be incorrectly priced and that the correct (and higher) price will be revealed on Tuesday after the quarterly disclosure.

That’s an awfully extraordinary claim, which requires extraordinary evidence.

Now, all arguments related to unknown future events involve presuppositions — this is logically unavoidable. The difference is whether the presuppositions are reasonable. For me, I believe that the market absorbs all publicly available data. Further, at the end of the day, it’s either going to be a net buyer or net seller.

Yes, it’s an obvious point. But through the sequence of net buys and net sells, it’s much easier to identify recurring patterns — and how the market historically responds to these patterns.

For example, in the trailing 10 weeks, the market has voted to buy XPEV stock four times and sell six times. During this period, XPEV incurred a downward trajectory. For brevity, we can label this sequence as 4-6-D.

Before jumping into a trade, market participants must establish the security’s null hypothesis, the assumption of no mispricing. In other words, the chance that a long position in XPEV stock will rise on any given week is 48.08%, a negative bias. Therefore, a debit-based options strategy must be able to beat this baseline probability; otherwise, there’s no point.

In the case of the 4-6-D sequence, XPEV stock tends to rise 60% of the time (in the week following the flashing of the signal). That’s a sizable positive delta over the baseline. Moreover, the median return assuming the positive pathway is 6.44%.

If we were to assume that XPEV stock closes at $19.81, the security could pop a few cents above $21.

Two Ways to Trade Xpeng

For the most aggressive trader, the 20.50/21.00 bull call spread expiring Aug. 22 is simply wild. This transaction involves buying the $20.50 call and simultaneously selling the $21 call, for a net debit paid of $17 (the most that can be lost in the trade). Should XPEV stock rise through the short strike price ($21) at expiration, the maximum profit is $33, a payout of over 194%.

If Xpeng knocks the quarterly numbers out of the park (like the Padres will hopefully do to the Dodgers this weekend), it’s possible that XPEV stock could easily surpass the $21 level. After all, the forecasts that I build off of past analogs are based on median results. The actual performance could be higher or lower.

For more conservative traders, the 20/21 bull spread expiring Sep. 19 could be more to your liking. This trade provides extra time margin for XPEV stock to trigger the same short strike price. Should unpredictable post-earnings digestion initially crater XPEV, you’d still be in the game.

Case in point is my successful Best Buy Co Inc BBY article. At first, BBY stock encountered volatility, probably because betting bullishly on discretionary retailers in a challenging economic environment is fundamentally a bad idea. But statistically, the math suggested that it was a good idea — it just needed extra time.

Finally, I believe that the 4-6-D is a genuine signal and not just noise. I ran a one-tailed binomial test on the sequence, revealing a p-value of 0.0644. This means that there’s a 6.44% chance that the implications of the signal could materialize randomly as opposed to intentionally.

In the unpredictable stock market? I’d say that’s very solid confirmation.

The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.

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