Options Corner: Skyworks Solutions' Plunge Presents A Quant-Driven Opportunity

Though several semiconductor enterprises experienced weakness on Wednesday, Skyworks Solutions Inc (NASDAQ:SWKS) stood out as one of the more conspicuous laggards, with SKWS stock losing about 12%. Largely, the move appears to be centered on broader negative sentiment against the industry, with connectivity-related demand being a potential problem area. Still, the downturn may present a possible upside opportunity.

Fundamentally, many experts have pointed to Skyworks' deflated multiples relative to prior elevated metrics as evidence that SWKS stock could be undervalued. At this moment, SKWS trades at 14.43-times forward earnings, which is noticeably lower than the 18.25 multiple seen at the end of September last year. Still, valuation ratios don't represent universal truth claims — they're relative metrics that have meaning within a particular model or framework.

For an options trade, a better approach may be to consider a quantitative methodology. Under quantitative analysis, a practitioner anticipates a security's next move by conditionally observing past behavioral patterns. In this sense, the quant operates very much like a head coach or manager of a team sport.

For example, in football, certain formations define the probability of how and where the play is likely to materialize. If the offense lines up in a shotgun formation, the opposing defense has a good idea that a pass is coming. It's not that you can't run the ball from the gun but the players are lined up in such a way that passing the ball is the most sensible route.

Likewise, when a stock is structured in a certain way, the formation tends to probabilistically constrain how the future can evolve. Theoretically, securities can go anywhere. However, they're bound by factors such as liquidity depth, positioning, crowding and dealer hedging flows, among myriad other elements.

These factors? They change based on how the stock is lined up. That's why I believe quantitative analysis offers supreme value in the options market. If you identify the formation, you're already a step ahead of the game.

Leveraging The Fallout In SWKS Stock

With the severe volatility of SWKS stock, it's looking at a trailing six-month loss of over 22%. In the last 10 weeks through Tuesday's close, SWKS only managed to print four up weeks, leading to a sharply negative slope. Ordinarily, this 4-6-D (four up, six down, downward trend) sequence would seem to have pessimistic implications as it appears the bears have control. Statistically, though, the opposite tends to be true.

Referencing a dataset going back to January 2019, under 4-6-D conditions, the forward 10-week returns tend to shift positively, with outcomes landing between $57 and $66 (assuming a spot price of $59.20). Probability density would likely peak around $60, though relative probability may be quite robust between $59.50 and $61.

Ordinarily, a trader may consider just targeting the point where probability density may hit its peak. However, when analyzing risk topography — a three-dimensional view of demand structure — we can see that the peak density target may possibly be too conservative.

Risk topography encompasses expected (terminal) price, probability density and population occurrence. Using this view, SWKS stock would be expected — based on past analogs — to see significant activity between $59 and $63.50 before terminating at the 10-week mark around $60.

However, it's important to note that this terminal forecast isn't set in stone. Further, the heightened transitional activity above $60 suggests that the ultimate endpoint may land higher than the aforementioned price level.

Subsequently, a shrewd options strategy may be to incorporate a vertical spread by anchoring the breakeven threshold near expected peak activity while allowing the second leg of the trade to stretch for a higher (but reasonable) strike price. In this manner, we can balance the risk of losing money in the trade with the potential to earn a large payout.

Betting On The Dead-Cat Bounce

It's also fair to point out that the current 4-6-D formation may not be like others. After all, SWKS stock doesn't typically drop double-digit percentage points over the course of a single session. Therefore, the possible bounce back could be more pronounced than usual.

As such, I believe the aggressive 60/65 bull call spread expiring Feb. 20, 2026 may be in play. This trade requires SWKS stock to rise through the $65 strike price at expiration to trigger full profitability. If it does, the maximum payout comes in at nearly 113%.

To be clear, a bull spread is a capped-risk, capped-reward transaction, meaning that SWKS stock moving above $65 will not lead to greater returns. However, based on past quantitative behaviors, $65 tends to be a reasonable blue-sky target. While one could go for much higher strikes, such targets would lack statistical precedent. Therefore, the 60/65 spread may be the most realistically aggressive idea.

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