MM56 - SPCX Launch Sequence
A question came up at the very end of session today about SPCX, and it is a good one, so I want to walk through it properly. This is not financial advice. I am not a CPA, I am not a certified trading advisor. I am just here to help you understand options a little better.
Since the IPO, SPCX ran all the way up to 225. I was very clear at the time. I sent the message that I did not think it was time to get in. What I said I would do instead was take some of my profit, convert it into option strategies using modified synthetic longs, and collar the stock I bought on IPO day. And here we sit, right back at the IPO level.
That was to be expected. It is what IPOs do. They run up on all the excitement, they sell back off, the options market opens up, and then we wait for volatility to come down so we can actually start trading. If you watched MM48, you saw me talk through SpaceX on day one, before any of this had a chance to settle.
Do I know if we have found the bottom? I do not. We have a lot of unlocks coming, tons of them over the next few months. So for me, I must have a strategy that is flexible. I need a way to pull different levers and move my queen around the chessboard if this moves against me.
So let's price some options. First choice, modified synthetic long. You all know I love these. But I am not going to just say fine, I will go at the money and sell the 140. Volatility is still high and these do not price out quite the way I want.
Remember my rule of thumb. The stock is at 150, and I am rounding off. I want to risk less than half. Anchoring a modified synthetic long is my first way to get leverage on the play, and later, when I start pulling levers and adjusting, I increase that leverage. But this is day one, and the widest I like to go is 20 percent of the price of the stock. At 150, that means 30 dollars wide.
So what might I do differently here? Maybe I want to bring in a little more credit, so I go 40 wide. The slightly out of the money 140 put spread pays me a 22 dollar credit. Do I just look at that and say perfect, I will take it? No way. Remember, this trade is two and a half years out. If I can get that initial put spread lower, it gives me protection when we pull back. So I kept pricing.
What I found next is the whole reason I am willing to give up the first 20 dollars of upside on this stock.