Easily one of the most popular names in the burgeoning space economy, satellite designer and manufacturer AST SpaceMobile (ASTS) has certainly delivered for its shareholders. So far this year, ASTS stock has gained roughly 91% heading into this weekend. However, it’s also fair to point out that the security has been quite volatile lately.
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Indeed, in the trailing month, ASTS stock has given up more than 19% of its value. Given that the space economy is likely to experience many years of growing pains ahead, recent investors are understandably concerned about holding the bag. Additionally, there is the matter that since late May, ASTS has increased by about 68%. Thus, earlier investors may be incentivized to take some profits while they still can.
Driving the crimson ink on a fundamental level was news that earlier this month, SpaceX struck a $17 billion spectrum deal with EchoStar (SATS). As TipRanks reporter Marty Shtrubel mentioned, the move is seen as a setback for AST because it bolsters SpaceX’s direct-to-cell ambitions — an area in which AST competes. Furthermore, in light of Shtrubel’s point, the deal raises concerns about increased competition in the satellite-to-smartphone market.
Still, ASTS investors shouldn’t necessarily panic since the underlying company intends to fill spectrum coverage gaps with its growing fleet of “BlueBird” satellites. On a statistical level — and one that’s relevant for options traders — ASTS stock has a tendency to bounce back from volatility.
Setting the Stage for AST SpaceMobile Options
While the traditional approach of buy-and-hold investing is straightforward, the concept of options trading eventually attracts retail market participants because of its underlying flexibility. Not only do these derivative contracts provide leverage, but you can also stack two option contracts together in a strategy called the vertical spread. Under this transactional geometry, small price movements can potentially result in significant payouts.
Now, the tradeoff is that vertical spreads are capped-risk, capped-reward transactions. However, if you’re only anticipating a move of a few percentage points, this strategy can be a tempting compromise.
Still, another significant concern about options is that they eventually expire. As such, a trading thesis must be multi-dimensionally precise; otherwise, you risk losing the entire principal that you put into the trade.
To narrow down the number of prospective wagers to consider, traders often employ a prescriptive methodology for predicting forward price movements. Generally, this process involves calculating the estimated high-low range of a security using implied volatility. From there, other methodologies — usually technical analysis — help formulate a course of action.
For my analyses, I prefer the lesser-utilized descriptive methodology. Rather than estimate where a stock may head next using convoluted calculations, I first identify a falsifiable quantitative signal. Then, studying past analogs, I analyze how the market tends to respond to the identified signal.
Since we’re dealing with the unknown future, there’s no absolute way to forecast future price action. However, I prefer the descriptive approach as it respects the actual pricing geometry of the target security.
Putting the Cards Down on the Quant Signal of ASTS Stock
With all this talk about signals, let’s dive into what has been observed — and what we might expect next. Over the past 10 weeks, ASTS stock has experienced four up weeks and six down weeks, with an overall downward trend throughout the period. Because of the distribution-heavy sequence, you might expect this signal — which can be labeled 4-6-D for classification purposes — to carry bearish implications.
Interestingly, however, ASTS stock tends to bounce higher when the aforementioned sequence repeats over the next several weeks. Granted, this observation needs to be taken with a grain of salt. As a recap, AST entered into the public market via a merger with a special purpose acquisition company (SPAC). ASTS began trading as a merged enterprise in April 2021.
Stated differently, there’s not a whole lot of market data to work with. As such, traders should be aware of high volatility risk with ASTS stock.
That said, I still want to understand whether the 4-6-D sequence has predictive power or is merely coincidental. To do this, I conducted an out-of-sample test for the period from 2022 to 2023, which includes several years of sideways trade. This period also precedes the extreme surge in ASTS stock in the spring of 2024.
What I discovered was that during the pre-boom sentiment regime, the 4-6-D sequence was an even more pronounced indicator of upside. Thus, I believe the sequence has predictive power, which options traders could potentially exploit for profit.
Dialing Up a Vertical Spread
Given the above market intelligence, a vertical strategy called the bull call spread appears to be enticing; specifically, the 40/42 bull spread expiring October 17th. This transaction involves buying the $40 call and simultaneously selling the $42 call, for a net debit paid of $75 (the maximum possible loss on the trade).
Should ASTS stock rise through the second-leg strike price of $42 at expiration, the maximum profit is $125, a payout of almost 167%. Breakeven sits at $40.75, which is 5.24% above Friday’s closing price.
At first glance, the gap to $42 — which stands at 8.47% — seems aggressive. However, ASTS stock is a highly kinetic asset. Additionally, based on our observations of the market’s response to the 4-6-D sequence, the $42 target may be on the conservative side. Besides, we’re not looking for a long-term investment here. Instead, we’re looking for a quick payday — and past analogs suggest that this is very possible.
How High Could ASTS Go?
Turning to Wall Street, ASTS stock carries a Moderate Buy consensus rating based on three Buys, four Holds, and zero Sell ratings. The average ASTS stock price target is $52.65, implying ~30% upside potential over the coming twelve months.
How Bad News Can be Good News for ASTS
While the news cycle hasn’t been friendly for AST SpaceMobile, the rise of competition in the spectrum race could be a positive for contrarian options traders. Essentially, ASTS stock enjoys a history of investors buying the dip, a phenomenon observed in both the boom and non-boom periods. As such, the observed distribution-heavy quant signal may have predictive power, making ASTS an enticing bullish opportunity.