It hasn’t been a particularly pleasant week for tech innovators and SoundHound AI (SOUN) — which specializes in conversational artificial intelligence — was no different. SOUN stock suffered considerable volatility for the business week ending Jan. 10, losing over 32% of equity value. Unfortunately, there’s little evidence to suggest that investors buy extreme dips in SOUN, making a directional wager imprudent. Instead, a special options strategy called the long iron condor would be appropriate for my Neutral sentiment.
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Of course, context matters. Even with the recent implosion, SOUN stock is still up over 127% in the trailing six months. Over the past 52 weeks, it shot up a blistering 674%. Thanks to robust revenues, significant order growth and optimistic guidance, SoundHound has surged to the forefront. Nevertheless, not all analysts are convinced that SOUN stock can continue swinging higher.
Notably, top investor JR Research warned that the competitive landscape in voice AI is far from solidified. Therefore, the expert warns against chasing SOUN stock. Just about the only thing investors can decisively agree on is that SoundHound generates considerable buzz. In other words, it’s the ride — not the direction — that investors should consider, making the long iron condor a compelling transaction.
SOUN Stock’s Behavior Lacks Predictive Power
Structurally, the long iron condor — a combination of bull and bear debit spreads — assumes a rise in implied volatility as the transaction establishes an upper and lower profitability target. Put another way, it doesn’t matter where SOUN stock ends up, so long as it hits or exceeds the short strike price of the bull call spread or drops to or below the short strike of the bear put spread.
Naturally, investors must have good reason for believing that SOUN stock will be volatile and this assumption stems from prior pricing patterns. Counting from May 2022, there have been 138 four-week periods. Of this figure, only 68 or 49.28% have resulted in positive returns. From a month-to-month basis, SoundHound suffers a slightly negative bias. What’s interesting is that following extreme events, the odds don’t seem to change much for SOUN stock.
For example, there have been 34 instances when SoundHound incurred a weekly loss of 10% or worse. Of this tally, 18 (52.94%) of the fourth subsequent week saw a positive return. For weekly losses of 20% or worse, there have only been six times (out of 13) when SOUN stock was in positive territory a month later. The evidence seems clear: extreme volatility (as investors saw last week) offers no directionally predictive power.
SoundHound AI’s Magnitude of Kinesis Is Bankable
Lacking a clear picture regarding the forecasted direction of SOUN stock represents only part of the iron condor puzzle. Specifically, investors must be reasonably confident that SOUN will move in either vertical direction with vigor. While it’s difficult to determine where SoundHound will head, it’s more certain that it will move with considerable pace.
On average, the median positive return of SOUN stock over a four-week period stands at 22.02%. During down periods, the median loss lands at 15.14%. However, these stats represent an aggregate tally. When considering the four-week response specifically following a 20% one-week loss, the median positive return shoots up to 28.41%. On the downside, the median loss slips to an alarming 34.92%.
Using the former “stochastic” method of price projections, SOUN stock may rise to $17.19 or fall to $11.96 four weeks from last Friday, coinciding with the options chain expiring Feb. 7. However, the dynamic method of price projection calls for a high-low target of $18.09 and $9.17, respectively, for the same expiration date. These stats will help inform arguably the most viable long iron condors.
Simplifying the Condor Mess
If you take a look at available iron condors, the list can be intimidating. With four legs (strike prices) involved per condor transaction, the combinations may seem endless. However, because we calculated the price projections of SOUN stock both stochastically and dynamically, the process is simplified: we’re simply going to look for the short (outer) strike prices that best correspond with our price projections.
First, the more conservative stochastic model calls for high-low range of $17.19 and $11.96. For the options chain expiring Feb. 7, one may consider the 12P | 13P || 16C | 17C long iron condor, or the combination of the 12/13 bear put spread and 16/17 bull call spread. However, the maximum payout of the trade was only 8% at time of writing.
A more compelling idea is to assume the dynamic pricing model. In this case, speculators can widen their condor to the 10P | 12P || 16C | 18C long iron condor (10/12 bear put and 16/18 bull call). As of this writing, the payout soars to 63%, which is far more enticing. Better yet, based on dynamic pricing, this condor has a surprisingly decent chance of being profitable.
Is SoundHound AI a Good Stock to Buy?
Turning to Wall Street, SOUN stock has a Moderate Buy consensus rating based on two Buys, two Holds, and zero Sell ratings. The average SOUN price target is $15.25, implying a 19.23% upside potential.
The Takeaway: Harness the Journey in SOUN Stock with a Long Iron Condor
Given the volatility and lack of directional predictability in SOUN stock, the long iron condor strategy stands out as a practical solution for speculative investors. By leveraging the company’s inherent tendency for significant price swings, this approach minimizes the need to predict the exact direction of movement and focuses instead on the magnitude of kinesis within the defined profitability range.
True, SoundHound’s explosive growth and frequent buzz in the AI sector highlight the stock’s allure, but its erratic behavior demands caution. The long iron condor provides a structured way to harness the stock’s volatility while mitigating directional risks. For investors seeking exposure to the AI revolution without betting on SOUN’s trajectory, this strategy balances opportunity and risk management effectively.
