Following the IPO on June 12th, options on SpaceX (SPCX) started trading last week on June 16th. In only three days of trading, SPCX options have averaged more than 1.5 million contracts traded on the daily average. This is a very large number when we consider the relatively low float in the name, as well as the lack of huge institutional ownership thus far. I believe the low float, the likely seller unlocks over the next few months and the high implied volatility, have all created an opportunity to incorporate tactical option sales as part of the early investment process in the name.
As far as the current float, only ~ 5% of the company was sold in the initial IPO. Not only does that mean the current small float likely accounts for the large day-to-day swings we have seen thus far, but there remains a huge amount of stock still waiting to be sold over the next six months or so. As far as some shorter-term dates are concerned, there is a 20% unlock by insiders after the earnings announcement in early to mid-August. In addition, there is an additional 10% unlock should the stock be trading 30% above the IPO price (so call it anywhere above 175). Finally, there are additional 7% unlocks set for around August 21st and then again on September 10th. All told, there could potentially be as many as 44% of shares sold by early September by insiders, increasing the current float by ~ 900%. Not only should these large unlocks likely put a fair amount of pressure on the shares, but the additional float added is likely to reduce the overall volatility in the name on a day-to-day basis given the large market cap in the name (once they have been absorbed).
Here are the key dates and unlocks to consider:
- ~Aug 10: +20% (with an additional 10% if stock is > $175)
- ~Aug 21: +7%
- ~Sep 10: +7%
- ~Sep 25: +7%
- ~Oct 10: +7%
- ~Oct 25: +7%
- ~Early Nov (Q3 earnings): +28%
- ~Dec 9: remaining shares for most insiders
SpaceX bulls will point to the Nasdaq and MSCI inclusions that are likely to happen over the next few weeks that could help offset some of the upcoming selling pressure in the name expected by the unlocks. The problem with that argument is that both Nasdaq and MSCI will use the current free float in SPCX and NOT the current market cap when determining the initial weighting for SPCX. Again, with only ~ 5% of the shares currently trading after the IPO, the weighting in both indexes will be much lower than when all the shares have been unlocked. Therefore, the buying needed on the index inclusion is likely to be much less than people likely initially suspected. Finally, S&P inclusion is not likely to happen until June 2027 since they decided to not “fast track” SPCX inclusion (while NDX did).
Against this backdrop, SPCX implied volatility is still “expensive”. Although it has come down sharply from the initial day of trading, 3-month (Sept) implied vol in SPCX currently trades ~ 85. In other words, the market is currently pricing a 33% move for SPCX over the next 3 months, or more than 130% move on an annualized basis. Given what we know about the potential overhang from the upcoming unlocks by September 10th, I believe selling calls against an existing (or any new buys) in SPCX should be strongly considered. This would be especially true should we see shares move back higher over the next week or so as they are down ~ $40 from the highs hit on Tuesday (the first day options started trading). I would focus on the September 18th expiration when considering call/vol sales as that “locks-in” the higher volatility sale for a longer duration and captures a large bulk of the initially planned unlocks.
Here is an example of a call sale trade I would consider at this time:
Sell SPCX Sept 18th $200 calls @ $25 (SPCX 185 Thurs closing ref)
Trade Details:
- Selling the 8% upside September calls against long shares
- Call sale yields 13.5% (55% annualized) with an upside breakeven of $225 by Sept 18th (recall that $225 was the initial highs hit post-IPO)
- Good way to take advantage of the elevated volatility and “protect” the long equity position thru a lot of the upcoming share unlocks
One other trade I favor is to sell both calls and puts against an existing long equity position given the elevated volatility (especially for a company of this size). Selling both the calls and puts (strangle) increases the net credit on the trade and makes both the upside and downside breakevens wider. Sticking with the same September 18th expiration, here is a short strangle trade idea I would suggest:
Sell SPCX Sept 18th $200 calls
Sell SPCX Sept 18th $140 puts
Trade collects ~ $35 (SPCX 185 Thurs closing ref)
Trade Details:
- Selling both the calls and puts in SPCX against an existing equity position (either long or short)
- 3-month implied vol trading ~ 85, I prefer to be a net seller of this vol with more of a short upside bias (due to the massive unlocks)
- Breakevens on this trade are $105 to the downside and $235 to the upside (43% lower and 27% higher)
- I prefer to sell the higher delta call as I believe there could be more downside risk than upside gain initially
- Would either own additional shares $30 below the IPO price, or would be a seller of long shares 27% higher and above the post-IPO highs
- Good way to capture the “rich” volatility for a company of this size
- Please contact me or the 22V sales team for updated pricing and execution capabilities on either trade
