Duolingo Inc (NASDAQ:DUOL) has practically captured everyone's attention but for entirely dubious reasons. Although the language-learning app reported upbeat fourth-quarter revenue, the company's sales guidance slipped below estimates. As a result, investors rushed for the exits, leading to a 15% loss in DUOL stock during the late-morning hours. Since the start of the year, shares are down around 43%.

Not surprisingly, several Wall Street analysts downgraded DUOL stock. Even experts who maintained optimism lowered their price forecasts. Still, the one group that apparently doesn't share in the pessimism is the smart money.

With so much uncertainty that was previously hanging in the air now cleared because of the earnings results, options traders have a clearer path forward. For the volatility skews of the monthly options chains expiring March and April, sophisticated market participants have structured their trades to benefit from upside convexity.

Essentially, the volatility skew is a visual representation of the surface-area distortion of volatility space, enabling retail traders to better understand how the smart money is positioned for risk. The skew is a lot like a soccer team's starting formation.

In the case of DUOL stock, the formation is an aggressive 3-4-3, with an extra forward up front. This setup makes sense for two reasons. First, DUOL obviously suffered a sharp pullback so a reflexive move could more easily send shares in the opposite direction (as in up). Second, the stock features extremely elevated short interest at 24.4% of its float.

With so much pressure on the bearish side, any optimistic development could send DUOL stock rocketing higher.

Establishing The Trading Parameters Of DUOL Stock

Although we now understand how risk ...