It’s no exaggeration to say that On Holding (NYSE: ONON) has been a massive disappointment. With even sector giants like Nike(NYSE: NKE) struggling for momentum, the harsh macroeconomic environment spared no mercy for ONON stock. That has especially been true following its second-quarter earnings disaster. Still, there’s a contrarian argument to be made that most of the bad news could be baked in.
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Just to recap, the Swiss-based athletic sports company — which specializes in the design, development, and distribution of premium performance footwear and apparel — posted revenue of $8.59 billion. Unfortunately, this haul fell severely short of the consensus expectation of $9.75 billion. As a result, ONON stock suffered a massive drawdown of more than 20%.
Quite frankly, there was little reason for investors to carry more risk than was necessary. To be fair, against the year-ago quarter, the company did quite well, seeing a 22% lift in net sales (at constant currency). But according to Google Finance’s summary sheet, bearish factors — including wholesale softness and tariff risks — clouded the overall narrative for On Holding stock.
With this new reality having been reflected in the market valuation for the company, the options market is now offering significant rewards for those who want to take the opposite side of the bet. And at first glance, the proposed deals may seem enticing. At the same time, traders should be aware of the broader sentiment risks.
Primarily, the smart money seems uninterested in long exposure in On Holding stock. If you look at the volatility skew for the October monthly options chain, the main prioritization appears to be pricing in upside convexity — possibly hinting at a near-term dead-cat bounce. But place the focus on the November monthly and suddenly, the skew seems to favor downside protection.
Further, the probabilistic math doesn’t initially seem to justify bullish trades.
Woeful Probabilities Infer a Negative Outcome for ONON Stock
Under standard financial logic, most experts (perhaps all experts) would likely advise you to stay away from ONON stock. Narrative-wise, there will probably be an anthropomorphism about On Holding needing to prove itself worthy of your hard-earned capital. Technically speaking, the ticker looks like a falling knife, thanks to its 52-week loss of more than 31%.
And the hits will keep coming when you consider the probabilities of success. As a benchmark ambitious idea, let’s consider the 32.50/35 bull call spread expiring Nov. 20. In order for this trade to work, On Holding stock must rise almost 17% to trigger the $35 second-leg strike on expiration day. If it does, the $94 net debit paid will turn into a $156 profit.
On paper, the deal sounds promising, in large part because of the trade’s positive asymmetry favoring the debit-side trader. You risk $94, and if all goes to plan, you get a profit of $156. Of course, the conditional statement is where reality slaps you across the face. Just to break even at $33.44 (on expiration), the odds of this event occurring sit at only 28%.
If you wanted to figure out what the chance is of ONON stock hitting $35 on Nov. 20, you can turn to OptionCharts.io’s Probability Distribution screener. Simply roll your mouse to the target price, and you’ll discover a probability of 18.26%.
You can see the problem in terms of expected value. In theory, the idea of targeting only positively asymmetric trades makes sense: you’ll lose many wagers, but when you do win, you’ll win big. That sounds great on paper, but this only works if the trade’s payout is so asymmetrically skewed that it can overcome a low probability like 18.26%.
The practical problem is that Wall Street isn’t stupid. You’re not going to get free payouts. Therefore, if ONON stock were to be a rational trade, you can’t change the reward structure. What you can change, though, is the presupposition that goes into baking the probabilities that you see.
Yes, You Can “Change” the Probabilities of On Holdings Stock
There seems to be a hidden reluctance among Americans about the concept of challenging “official” statistics — I’m not sure if this is a remnant of the Protestant work ethic. But rest assured that when you see Black-Scholes-derived probabilities, they should not be treated automatically as gospel truth.
Instead, they are presuppositional — and this concept is philosophically unavoidable. Because the unknown future is, by definition, unknown, you cannot deterministically state that a particular presupposition is somehow privileged. You must audit the underlying assumptions and come to a conclusion that you find the most convincing and credible.
In the case of ONON stock and the aforementioned bull spread, the low probabilities stem from Black-Scholes, which itself presupposes that the target security undergoes a random walk between now and the selected expiration date, with the current implied volatility (IV) serving as a constant throughout the journey.
So yes, if you believe that On Holding stock will trade in a random, risk-neutral environment, the probabilities mentioned above — 28% to break even, 18.26% to full profitability — are valid. They reflect the math of randomness.
However, the meta question you should be asking is: will ONON stock truly trade randomly?
I don’t think it will. If we consider rolling 10-week sequences of ONON’s price history as individual Markov states, then we can say that the current state is an incredibly bearish one. In the last 10 weeks, we know that On Holding stock has only managed to print three up weeks, thereby leading to a downward slope.
We also know that under such extremely pessimistic Markov states, ONON stock tends to transition to a higher plateau. If we were to juxtapose the median expected performance to the current share price, we may calculate a probability between 46.7% and 60% that the ticker will hit $35 on or around Nov. 20.
Wall Street is not waiting for this company to become famous.
Institutions already control 88% of its shares.
This business generates billions in operating income, controls a massive American energy footprint, and is now using Palantir’s AI technology to improve its operations.
Yet the market still values it at less than $8 billion.
If the Markov probabilities turn out to be accurate, they would arguably make the 32.50/35 bull spread far more enticing. Suddenly, the same trade that suffered from negative expectancy would enjoy positive expectancy — all thanks to a shift in presuppositions.
Of course, the counterargument is asking whether the Markov presupposition is better suited for ONON stock.
I have to be honest, I simply don’t know. But the reason I prefer Markov chains rather than a straight random walk is that I don’t see any evidence that the price discovery process is random. To me, it is clear as daylight that the future is dependent on the past, not independent as Black-Scholes presupposes.
To be fair, the Markov framework for On Holding stock is extremely risky because of the low sample size problem. With the ticker IPO’ing in 2021, the data pool is unfortunately limited. Still, what we can infer is that, from the dataset that is available, the current bearish Markov state tends to yield positive results for risk-tolerant speculators.
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