On paper, Chewy Inc. (CHWY) should be crushing it right now. Study after study shows Americans are absolutely obsessed with their pets, treating dogs and cats like full family members and spending accordingly. The pet care market is booming, e-commerce is thriving, and Chewy sits right at the intersection of both trends.

So why has the stock been such a disaster? Over the past year, CHWY has fallen 13%. Zoom out to five years, and you're looking at a brutal 70% decline. The COVID-19 normalization hit e-commerce specialists hard, and Chewy hasn't been immune. While the stock caught a bid recently, the overall picture remains grim for shareholders.

But here's where things get interesting for opportunistic options traders. That extended red ink might actually be setting up a compelling contrarian play.

Now, it's not just about the fundamental story—though that certainly matters. Americans' love affair with pets has reached genuinely absurd levels, but that passion is already baked into how the market values Chewy. Markets don't price facts; they price changes in facts or shifts in expectations.

So what's changed? I'd argue it's primarily the stock price itself. Sure, economic headwinds have weighed on the business, but the core proposition remains intact. Pet ownership isn't declining. The need for pet supplies hasn't disappeared. The fundamental catalyst is still there, which suggests the market may eventually recognize CHWY as discounted and send shares higher.

The Markov Property and Market Memory

Can anyone be certain about what happens next? Obviously not. But volatility doesn't exist in a vacuum. Where Chewy stock goes tomorrow depends heavily on what's happening today. This concept—the Markov property—suggests that the present state shapes the probability distribution of future outcomes.

Think about it this way: If you're flying on a major U.S. airline on a routine domestic flight, you're engaged in one of the safest activities imaginable. But if you're on an airline in a sanctioned country with sketchy maintenance and a potentially impaired crew, your odds change dramatically. The activity is the same, but the path matters.

The same logic applies to markets. Chewy stock, like any popular public security, is path dependent. What happened yesterday (however you define yesterday) almost certainly influences what happens today (however you define today).

Here's where conventional Wall Street risk pricing gets interesting. Everyone uses some variant of the Black-Scholes model, which fundamentally assumes that volatility is independent. Risk gets defined primarily as the distance between a target price and the current spot price. That makes intuitive sense—a layup is easier than a three-pointer because you're closer to the basket.

But in real game situations, the path to that layup might be heavily defended. Sometimes the open player standing outside the arc represents the more probabilistically sound option. Distance alone doesn't tell the whole story.

Under normal conditions, a long position in CHWY held for 10 weeks would typically range between $32 and $33.60, assuming a spot price of $32.52. But here's the thing: the current state isn't normal. It's highly pressured, and that pressure changes the forward implications significantly.

Look at the recent pattern. Over the last 10 weeks, Chewy printed only three up weeks, creating a clear downward slope. This 3-7-D sequence (three up, seven down) fundamentally alters the probability distribution. Under these conditions, the forward 10 weeks would likely shift the range to between $28 and $45, with probability density peaking around $38. Even over just the next five weeks, prices under 3-7-D conditions would tend to terminate around $37.

That empirical observation gives us a natural target.

Setting Up the Contrarian Trade

Because of this extended pessimism, market makers have developed a dim view on Chewy stock. That skepticism is precisely what makes a contrarian position enticing. The options market is pricing in continued weakness, but the path-dependent analysis suggests otherwise.

The trade that catches my attention: a 35.00/37.50 bull call spread expiring February 20, 2026. This requires CHWY to rise through the $37.50 strike at expiration, which the Markov-based analysis indicates is a very real possibility. If the stock does reach that level, the maximum payout stands at nearly 372%. Breakeven lands at $35.53, adding probabilistic credibility to the wager.

Here's where the two competing worldviews collide. Under the Black-Scholes model, CHWY hitting $37.50 by February 20 is considered a low-probability event—just 13.39%. In probability density terms, that outcome sits somewhere on the fat tail, indicating an unlikely scenario.

But under a hierarchical framework using the Markov property, Chewy reaching $37.50 becomes a considerably higher-probability event. The difference? One model completely ignores the path that brought the security to its current price. The other recognizes that the extended selling pressure itself changes what comes next.

Because CHWY stock is not operating under a normal behavioral state—it's been beaten down persistently—I prefer the Markov property as a more accurate reflection of market reality. The conventional model treats each day as independent. The path-dependent model recognizes that markets have memory, and that extended moves in one direction often precede reversals.

Does that guarantee profits? Absolutely not. But it does suggest the options market may be materially mispricing the probability of a near-term rebound. And for traders looking to make asymmetric bets, that's exactly the kind of setup worth exploring.