Consumer packaged goods giant Conagra Brands (CAG) will release its earnings report for its fiscal fourth quarter on June 10. By perhaps most indications, investors are anxiously biting their fingernails. Since the start of the year, CAG stock dropped nearly 24%, reflecting sustained negativity. Indeed, since CAG collapsed in October last year, it really hasn’t been able to inspire investor confidence.

Much of the erosion centers on the challenging economic environment and the structural headwinds that have materialized. As Barchart’s Neha Panjwani wrote, “Conagra's underperformance is attributed to lower sales and weaker performance across all segments. Management blames supply constraints limiting shipments to retailers rather than a slowdown in consumer demand. Consumption lagged shipments, and volume is still under pressure due to ongoing supply chain challenges. Furthermore, consumers are turning to private-label brands to offset inflation impact.”

Unfortunately, neither investors nor analysts are buying into management’s constructive framing of the company’s difficulties. Presently, CAG stock carries a Hold assessment from Wall Street analysts. What’s even more telling, only two experts rate CAG favorably (with both ratings being Strong Buys). About the only real positive is that the consensus price target is $24.22, implying growth of around 14.6%.

Still, that’s where the good news ends, at least on the surface level. Per the Barchart Technical Opinion algorithm, CAG stock rates as a 100% Sell. If that wasn’t warning enough, options flow — which focuses on big block transactions likely placed by institutional investors — sat at $22,400 below parity, favoring the bears.

The biggest transaction by dollar volume was for bought puts expiring July 18, indicating direct bearishness. That’s because for debit-based strategies to be successful, the underlying security must reach predetermined profitability thresholds.

Using Game Theory to Establish a Strategy for CAG Stock

Although fundamental narratives provide important color and context, they lack specificity. Traders (especially options traders) require a thesis to not only cover the magnitude component (y-axis) but also the time element (x-axis). In other words, traders live in a world of probabilities.

It’s here that the game of blackjack — and specifically the card-counting strategy — is instructive. Professional blackjack players keep a running count in their heads of the cards that have been dealt, separating individual cards into three distinct states: positive value, neutral value, negative value. Essentially, the idea is to bet large when the odds favor the player and bet small when the odds favor the dealer.

However, knowing when it’s advantageous to strike requires the player to calculate two types of probabilities: derivative and conditional. Derivative probabilities calculate outcome odds across the dataset’s entire distribution, which can also be viewed as a Gaussian framework. Conditional probabilities calculate outcome odds for a specific circumstance, forming the basis for Markovian analysis. Under a Markovian principle, a blackjack player will estimate the likelihood of the current hand being favorable or not.

Enticingly, the same principle can be applied to the stock market but this is where I’d say 99.99% of financial experts get tripped up: Markovian principles really work best when applied to discrete events. Share price and its derivatives are not discrete but are rather continuous scalar signals and are inappropriate for applying the framework invented by Russian mathematician Andrey Markov.

To remedy this matter, we can convert share price into market breadth or sequences of accumulative and distributive sessions. As a representation of demand, market breadth is effectively binary and thus lends itself to easy categorization and quantification. These attributes then facilitate conditionally probabilistic analysis.

Currently, CAG stock is printing a compelling quantitative signal: a 2-8-D sequence or two up weeks and eight down weeks across the 10-week period. Admittedly, this conversion process compresses CAG’s magnitude dynamism into a simple binary code. But the benefit is that we can now segregate market behaviors into distinct, discrete demand profiles.

From past analogs, we know that when the 2-8-D sequence flashes, there’s a 54.55% chance that the price action for the following week (which corresponds with the business week beginning July 7) results in upside, with a median return of 2.54%. Should the bulls maintain control for a second week, investors may anticipate an additional performance boost of 1.23%.

Granted, a 54.55% upside success ratio isn’t much of an advantage — until you consider that CAG stock actually has a negative bias when viewed from a Gaussian lens.

A Sensibly Aggressive Trade to Consider

Based on the market intelligence above, intrepid speculators may consider the 21/22 bull call spread expiring July 25. This transaction involves buying the $21 call and simultaneously selling the $22 call, for a net debit paid of $55 (the most that can be lost in the trade). Should CAG stock rise through the short strike price ($22) at expiration, the maximum reward is $45, a payout of nearly 82%.

What makes this trade intriguing is that, if the bulls can sustain the sentiment reversal implied by the 2-8-D sequence, CAG stock should be able to reach $22, if not clear it at expiration. Further, the breakeven price for this trade is $21.55, which is within reason based on past analogs. Finally, as a baseline, the chance that CAG will be profitable on any given week is only 49.71%, thus incentivizing a bullish posture in response to the aforementioned sequence.