Options Corner: A Shifting Real Estate Landscape Shines A Bullish Spotlight On Rocket Companies

Initially, circumstances for mortgage lending giant Rocket Companies Inc (NYSE:RKT) did not look appealing, with RKT stock making its public market debut at the peak of the post-pandemic housing euphoria. Fundamentally, that left virtually no realistic margin for sustained growth, subsequently cratering the equity. However, with positive undercurrents materializing in the real estate market — along with a compelling quantitative signal — RKT is on the rise.

Much of the enthusiasm for RKT stock appears to be tied to the Federal Reserve's dovish pivot in monetary policy. In September, the central bank cut the benchmark interest rate to a range between 4% to 4.25%. Just recently, policymakers announced that the rate will be lowered again to a range between 3.75% to 4%.

Subsequently, the move should be a welcome one for prospective homebuyers, who have previously been burdened with onerous financing costs. And while housing prices themselves have been historically elevated, there's evidence that even here, buyers may see some relief.

Earlier this summer, real estate data revealed that there was reluctance among buyers to meet high asking prices in certain markets. While this dynamic forced some sellers to withdraw their listings, others have offered discounts. It's this latter development that could be of interest for prospective investors of RKT stock.

If both rates and prices drop, that would likely be a net positive for the housing market rather than the expected whack-a-mole game of lower rates leading to higher prices. From an observational standpoint, then, RKT stock deserves serious consideration.

A Quant Signal Shines Bright For RKT Stock

Two other factors could contribute to a possible upswing in RKT stock. First, Rocket Companies will be expected to post its third-quarter earnings report tomorrow after the closing bell. Analysts will be looking for Rocket to post earnings of 3 cents per share on revenue of $1.69 billion. In my opinion, what's going to drive sentiment is management's commentary and guidance rather than the actual print.

If what we're seeing in the broader real estate landscape is any indication, there's a solid chance that Rocket can surprise to the upside.

Of course, earnings results and the market's response are incredibly difficult to predict. What's more reasonable from a forecasting perspective is the quantitative picture. Using data since Rocket's initial public offering, the projected 10-week returns of RKT stock form a skewed distributional profile, with prices expected to range between $16.90 and $18.10 (assuming an anchor of $17.30). Further, price clustering would be most prominent at approximately $17.35.

However, we know through GARCH (Generalized AutoRegressive Conditional Heteroskedasticity) studies that the diffusional properties of volatility are non-linear and clustered rather than linear and orderly. By logical deduction, it stands to reason that different market stimuli yield different market behaviors.

In the last 10 weeks, RKT stock has printed a 4-6-D sequence: four up weeks, six down weeks, with an overall downward slope. Under this specific distribution-heavy stimulus, RKT's distributional profile changes from the baseline or homeostatic state. Rather than a range between $16.90 and $18.10, the risk-reward tails expand to $15.75 on the low end and $19.25 on the high end.

Most significantly, prices would be expected to cluster predominantly at around $17.75. Therefore, under 4-6-D conditions, traders may anticipate a 2.31% positive delta in price density dynamics.

That might not sound like much but when you factor in the inherent leverage of an options-based strategy like the vertical spread, this delta may provide an asymmetric edge.

Two Ways To Attack Rocket Companies

Setting aside the upcoming earnings report, when looking at Rocket Companies strictly by the numbers, the trade that arguably makes the most sense at this hour is the 17/18 bull call spread expiring Dec. 19. This transaction involves buying the $17 call and simultaneously selling the $18 call, for a net debit paid of $42 (the most that can be lost).

Should RKT stock rise through the second-leg strike ($18) at expiration, the maximum profit would be $58, a payout of over 138%. Breakeven lands at $17.42, which appears to be a realistic target based on the aforementioned price clustering dynamics.17

However, those folks who want to bet on a positive earnings report may consider the same geometric 17/18 spread but for the Nov. 21 expiration date. That would lead to a maximum payout of roughly 133%. Breakeven would come in at $17.43, which is ambitious because of the shortened time period. However, the cheaper net debit of $43 might entice speculators.

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