Deciphering where a publicly traded security may move to next is a deceptively difficult exercise. Especially when it comes to options trading, it’s not enough to have conviction regarding directional movement. Instead, you’ve got to accurately predict the magnitude of the price action, along with the time it would take to materialize.

Subsequently, options traders quickly find out that forecasting stock prices represents a vexing three-dimensional problem. Making matters worse, in normal conditions, especially for blue-chip giants like Merck (MRK), the odds that a long position will be profitable over, say, a one-week period, are around 50/50. If we’re splitting hairs, for MRK stock, it’s 51.83%.

The point is, a 1.83% probability advantage over 50/50 isn’t really much of an advantage.

It’s here that the unique geometry of vertical spreads — particularly debit spreads — may be attractive for advanced market participants. By structuring trades that effectively negate the “tail risk” of the magnitude component, calculated probabilities can be read at face value. After all, there’s a big difference between a stock being profitable versus being profitable by a specific amount.

Still, even geometric tactics can always benefit from outside factors that can further tilt the odds in one direction or another. And that’s the deceptive component regarding stock price predictability. Over the long run, probabilities gravitate toward the 50/50 zone. But by looking at the individual ebb and flow of the market, it’s obvious that the odds are never always 50%.

That’s where streak analysis is a powerful tool.

MRK Stock Potentially Stands Poised for a Rebound

While the financial analysis ecosystem is chock full of various signals and indicators, streak analysis — or the process of examining how a security or market behaves following a series of consecutive gains or losses over defined time periods — represents one of the most underrated tools. This methodology focuses on the sequence of outcomes to uncover behavioral patterns that may shift probabilities going forward.

Primarily, streaks don’t just symbolize price movements but rather psychological events. When a stock moves higher or lower over consecutive time periods — particularly if the sequence represents weeks — it doesn’t just chart a trajectory. It builds a story in the minds of investors. Subsequently, these emotions affect behavior, with traders increasing or decreasing their exposure based on the streak.

A parallel takeaway is that as the strength of the streak develops, market participants hinge their exposure largely on the price action instead of just the fundamentals. As such, streaks — especially sizable ones — may carry embedded sentiment and expectation, thus potentially altering future probabilities.

In many ways, these streaks become feedback loops and are able to shift risk profiles. Suddenly, a 50/50 stock is no longer that but a heavily biased wager.

With that in mind, a compelling opportunity exists in MRK stock. With Thursday’s close, Merck printed six consecutive weeks of market losses. While an ignominious statistic, over the trailing decade, MRK has rebounded 67% of the time whenever it encountered such a down streak.

Granted, there have only been three such streaks, which is a laughably small data sample in any other context. But with a security like MRK stock, I believe there’s merit in acknowledging the streak and its forward predictability. As a blue chip, such sustained volatility is rare. It’s almost certain that at least some sophisticated traders are looking for a contrarian wager.

Merk just might provide the medium of speculation.

Two Call Spreads to Consider This Week

For the options chain expiring this Friday, swing traders may consider two approaches. First, the 76/78 bull call spread looks awfully enticing. This transaction involves buying the $76 call (at an ask of $360) and simultaneously selling the $78 call (at a bid of $226), resulting in a net debit paid of $134, the most that can be lost in the trade.

Should MRK stock fall through the short strike price, the maximum reward is $66, or a payout of 49.25%. Since the market price and the short strike are the same, the magnitude component of the probability game can effectively be nullified. If you believe that MRK will rise this week, that’s more than enough for this spread to be fully profitable.

If you want to get more aggressive, the median return — assuming a six-down-week reversal — is 5.11%. That would lead to a price target of just under $82. To meet halfway in the middle, a trader can opt for the 70/80 bull call spread expiring this Friday.

This transaction involves buying the $79 call and simultaneously selling the $80 call for a net debit of $53. Should MRK stock rise through $80 at the end of Friday, the reward is $47, a sweet payout of nearly 89%.