Space Exploration Technologies Corp (SPCX) or “SpaceX” has exploded on to the scene following their record-breaking IPO.
Implied volatility is through the roof at 111.18%, which means option premiums are very expensive. That can be a great scenario for option sellers.
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SpaceX is a public spaceflight, telecommunications, and AI company that designs, manufactures, and launches advanced rockets and spacecraft, operating the world’s leading launch service with a rapidly expanding Starlink satellite network.
Its mission centers on reducing spaceflight costs and ultimately enabling human settlement on other planets, supported by reusable launch vehicles and a dominant role in U.S. government and commercial space operations.
Today, we’re going to look at a bull put spread trade.
A bull put spread is a bullish trade that also can benefit from a drop in implied volatility.
The maximum profit for a bull put spread is limited to the premium received while the maximum potential loss is also capped. To calculate the maximum loss, take the difference in the strike prices of the long and short options, and subtract the premium received.
SPCX BULL PUT SPREAD
SpaceX’s expected move between now and July 17th is around 21.65% in either direction. On the downside, that would put SPCX stock at around $158.
In other words, the options market is expecting SPCX stock to stay above $158 between now and July 17th.
To create a bull put spread, we sell an out-of-the-money put and then by a put further out-of-the-money.
Selling the July 17th put with a strike price of $155 and buying the $145 put would create a bull put spread.
This spread was trading yesterday for around $1.90. That means a trader selling this spread would receive $190 in option premium and would have a maximum risk of $810.
That represents a potential 23.46% return on risk between now and July 17th if SPCX stock remains above $155.
If SPCX stock closes below $145 on the expiration date the trade loses the full $810.
The breakeven point for the bull put spread is $153.10 which is calculated as $155 less the $1.90 option premium per contract.
Conclusion And Risk Management
One way to set a stop loss for a bull put spread is based on the premium received. In this case, we received $190, so we could set a stop loss equal to the premium received, or a loss of around $190.
SpaceX is likely to be very volatile over the next few weeks, so make sure this trade suits your risk profile before pulling the trigger.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
On the date of publication, Gavin McMaster 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. For more information please view the Barchart Disclosure Policy here.
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