Dear SpaceX Stock Fans, Mark Your Calendars for June 16
Following a blockbuster debut on the exchanges at the end of last week, options on SpaceX (SPCX) shares will start trading today, if a Reuters report is to be believed. SPCX stock has rocketed close to 43% in just two full trading sessions, and with options on it soon going live, new avenues open up…
Following a blockbuster debut on the exchanges at the end of last week, options on SpaceX (SPCX) shares will start trading today, if a Reuters report is to be believed. SPCX stock has rocketed close to 43% in just two full trading sessions, and with options on it soon going live, new avenues open up for the Elon Musk-led company’s optimists and pessimists alike.
Along with that, risk management is another aspect that will become available for investors.
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What Do Options on SPCX Mean for the Stock?
Options are financial instruments that are primarily used as risk management measures for the underlying asset. Calls and puts are the two most popular forms of options on any asset. While calls are an option to buy the underlying asset at a predetermined price, puts are the same, just for selling. Essentially, calls are a bullish bet on the asset, while puts are bearish ones.
Here, investors convinced of SpaceX’s trajectory and future value can enhance their existing positions on the company by buying calls, while the skeptics expecting an inevitable crash can go long on puts and enjoy the downside. Moreover, as a risk management tool, SpaceX bulls can buy puts to protect them from a downside, while bears can, conversely, buy calls.
Meanwhile, those expecting volatility in SPCX stock can opt for numerous volatility strategies involving options to benefit from the same. Finally, options can also act as an indicator of sentiments around the stock.
Now that options for SpaceX have been established, a peek at history to take a look at how Musk’s “other” company’s stock behaved following the start of options trading on it should be interesting.
About SpaceX
Founded in 2002, SpaceX is the world’s dominant commercial space company and operates three major businesses, which are Launch Services, Satellite Communications, and Defense and Government Services.
Some of its notable highlights include being the largest launch provider in the world, the largest satellite operator in the world, one of the fastest-growing internet providers globally through Starlink, a major NASA and Pentagon contractor, and having ambitions to populate Mars.
Its market cap has already exceeded $2.5 trillion.
Can Tesla’s Options Story Be a Trailer for SpaceX?
Just like SpaceX is not merely a space company, Tesla (TSLA) was not just a conventional car company when its shares got listed in 2010. However, the options story on Tesla became genuinely interesting when the stock broke out in 2013.
Tesla’s first profitable quarter in Q1 2013 sent shares from under $40 in January to nearly $194 by September of that year, a roughly 400% move in nine months. Implied volatility during that period was consistently in the 60 to 80% range, already elevated relative to a typical S&P 500 ($SPX) stock running at 15 to 20%. The pattern since then has been one of structurally high implied volatility rather than a clean directional trend. TSLA’s IV routinely runs between 55% and 90%, with spikes well above 100% during earnings weeks or periods of Musk-related news.
On the calls versus puts debate, the data over the long run leans decisively toward calls dominating open interest and volume. Current put volume on TSLA runs at approximately 1.29 million contracts versus call volume of 1.87 million, for a put-to-call ratio of 0.69, and that ratio has been structurally below 1.0 for most of Tesla’s listed history, meaning calls consistently outnumber puts in both volume and open interest. That is partly retail-driven enthusiasm and partly the mechanics of covered call writing by institutional holders.
Meanwhile, whether buying or selling has predominated, the evidence points toward net buying, particularly of calls, driven by retail speculation that has made TSLA one of the most actively traded options tickers in the U.S. market for over a decade. However, the persistently elevated implied volatility also means that sophisticated participants have found a significant edge in selling premium against that retail flow, making TSLA a two-sided market in a way that few single stocks sustain over long periods.
Final Take
If history is any indicator, anything related to Musk has been volatile, considering his foray into different realms and his penchant for moving stocks with a single social media post. SPCX stock should be as well, although the sentiment surrounding the stock is quite bullish now. In such a scenario, long straddle or long strangle strategies to profit from this volatility can be an effective tool. These strategies benefit from both upside and downside in a stock and are made for volatility. However, investors should be careful as these strategies will profit only if the realized volatility stays above the implied volatility of the stock.
Thus, rather than immediately adopting these strategies as soon as the options go live, watching them for a few trading sessions would be a prudent move.
On the date of publication, Pathikrit Bose did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
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