In fact, that could potentially happen as the S&P 500 prepares for its third-quarter rebalancing on September 18, a process where the index committee reviews companies and makes changes to ensure the index continues to represent the U.S. stock market. KBW analysts believe upcoming changes could create an opportunity for new companies to join one of the world’s most closely followed stock indexes.

Being added to the index is considered a major milestone because it often increases a company’s visibility among investors. And many funds that track the S&P 500 are required to buy shares of companies that are added, which can create additional demand for the stock.

Rocket Companies Emerges as a Top S&P 500 Candidate

KBW believes Rocket Companies (NYSE: RKT) is one of the strongest candidates for a future addition. Rocket is currently the sixth-largest company among those eligible for inclusion in the S&P 500 and is the largest eligible financial company that is not already part of the index.

Rocket Companies is best known for its online mortgage platform, Rocket Mortgage, which has helped transform the home loan industry by allowing customers to apply for mortgages digitally. The company has also expanded into other areas of personal finance, including real estate services and lending products.

KBW gave Rocket a medium probability of being added during the third-quarter rebalancing. However, the firm said Rocket has a medium-to-high chance of joining the S&P 500 over the next several quarters if it continues to meet the index’s requirements.

Affirm Gains Attention as a Fintech Contender

Another company receiving attention from analysts is Affirm Holdings (NASDAQ: AFRM), a financial technology company that provides buy now, pay later services. 

Affirm allows consumers to split purchases into multiple payments instead of paying the full amount upfront. The company partners with retailers and online businesses to offer flexible payment options to shoppers.

KBW also assigned Affirm a medium probability of being added to the S&P 500 during the upcoming rebalancing. The company’s growth in digital payments and consumer finance has made it a notable name in the fintech industry.

For both Rocket and Affirm, joining the S&P 500 could bring important benefits. Index inclusion can increase a company’s exposure to large institutional investors and may improve trading activity in its shares. Investors who follow the S&P 500 often pay close attention to additions and removals because these changes can influence stock prices.

Inclusion is Not Guaranteed

The S&P 500 committee makes the final decision, and companies must meet specific standards before they can become members. These standards include requirements related to market capitalization, profitability, liquidity, and public share ownership.

If Rocket or Affirm are added, the move would represent a significant achievement for both companies. It would place them alongside some of the largest and most recognized businesses in the world and could attract increased attention from investors.

As the September rebalancing announcement approaches, market participants will be watching closely to see which companies earn a spot in the S&P 500. Rocket Companies and Affirm Holdings are two names that analysts believe could be among the next group of companies to join the benchmark.

Still, you don’t typically find outsized opportunities from obvious trades. For the highest of rewards, you usually have to accept a greater margin of risk. RKT may not be a contrarian move for its own sake. Instead, some justifying points underscore the aggressive bullish thesis.

First, on a broader level, no one can deny that the economy isn’t firing on all cylinders. However, it’s not a pure headwind for all categories. Because of the K-shaped recovery from the pandemic, the top arm of the K is essentially doing the heavy lifting, especially for the housing market.

Translation? First-time buyers only represent 21% of the market — a record low. Still, equity-rich players (such as repeat buyers or those from older generations) aren’t as sensitive to the 6.3% mortgage rates due to a variety of factors. These include higher income levels and significant cash holdings from prior home sales.

Another critical factor to consider is the aforementioned rate sensitivity and the possible “refi” opportunity. Sure, the current 30-year fixed is hovering around 6.4%. However, the key characteristic to note is the 60-month beta of RKT stock. If the benchmark rate experiences any downward movement — which is something the Trump administration has long pushed for — RKT could see a disproportionately positive impact.

Fundamentally, there’s a massive backlog of “locked-in” homeowners. Therefore, even a modest dip in rates could trigger a significant refinancing wave. Thanks to Rocket’s digital-first platform, the company can scale capacity almost instantly to meet a surge in volume — offering a sharp contrast to traditional retail banks.

Of course, from a trading perspective, such a thesis extends beyond a typical short-term timeframe. Nevertheless, the front-running sentiment of such a move could trigger active motion in RKT.

Using Inductive Math to Strategize a Plan for RKT

While the fundamental narrative underpinning the contrarian case for Rocket stock is intriguing, I’ll be the first to admit it doesn’t provide a quantifiable blueprint for trading RKT. Yeah, there’s potentially a reversion-to-the-mean play here with the security suffering red ink over the past few months. It does seem, though, that RKT has found a bottom on March 30.

Still, that doesn’t definitively answer the question: where will RKT head and within what timeframe?

That’s perhaps the biggest difference between options trading and writing a standard finpub piece. With the latter, you can handwave an explanation, and there’s always a solid chance that dumb luck may be enough to make you look prescient. Unfortunately, with the former, handwaving isn’t effective because there are time-based endpoints to meet.

In this scenario, we need to find a more tangible methodology. That’s where induction comes into view.

At the end of the day, induction is pattern recognition, relying heavily on the uniformity of nature: the assumption that the future will behave like the past.

Consider our national pastime. If a player has a career hitting average of .250, the basic inductive assumption is that for every 100 pitches that they see, they’re going to hit 25 of them. As such, people often talk about players being due for a timely contribution. I hypothesize that the equities market works in a similar fashion.

For RKT stock, a random 10-week hold (using data going back to the company’s initial public offering) should yield a forward distribution landing between roughly $15.20 and $16.20, assuming a starting price of $15.56. Notably, the exceedance ratio — or the likelihood that this 10-week long position will end up in the black — stands at 55%.

That’s a solid statistic, meaning that out of 100 times you buy RKT stock, you’re likely to be profitable 55 times. But we’re not interested per se in understanding the forward probability under aggregate conditions. Rather, we’re interested in the expected distribution of outcomes in the current behavioral state.

In the past 10 weeks, Rocket stock has only printed three up weeks, leading to an overall downward slope. This 3-7-D quantitative signal statistically carries a different distribution relative to the aggregate of all signals. Under this behavioral state, we would expect RKT to range between $14 and $20.50, with probability density peaking on average at $17.

Now, we have an identifiable target that we can potentially exploit.

Zeroing In on a Specific Trading Idea

Honestly, with the inductive math above, my job is doing itself. Aggressive contrarians may want to consider the 17/18 bull call spread expiring June 18. This trade involves buying the $17 call and selling the $18 call simultaneously on a single execution. We’re looking for RKT stock to rise through the $18 strike at expiration. If it does, the maximum (capped) payout clocks in at over 138%.

Adding to the enticing nature of the trade, the breakeven price on this bull spread sits at $17.42. It’s a bit beyond the expected peak probability density, landing at $17. However, this is arguably a reasonable stretch as prior technical support for RKT stock was around $18. Thus, if a reversion to the mean happens, the second-leg strike is well within the realm of rationality.

In fact, I wouldn’t be opposed to the ultra-aggressive 18/19 bull spread (also expiring June 18). Yes, $19 would stretch into the final third of the expected forward distribution. However, with a net debit per spread of only $30, it’s a low capital exposure with plenty of upside. Should RKT stock rise through the $19 strike at expiration, the max payout would be over 233%.

Granted, Rocket stock is an extremely ambitious idea. Further, induction is not foolproof, which is subject to the black swan risk. In other words, just because you see a thousand white swans doesn’t necessarily mean that all swans are white. Nevertheless, in a world of uncertainties, induction is perhaps the best tool retail traders have to level the playing field.