The $500K Bet on a Space Stock Floor

Hey Traders,

Wall Street is chock-full of eccentric visionaries, including two who are battling in the race for space tourism: Richard Branson and Elon Musk.

Branson heads up Virgin Galactic (Ticker: SPCE) and Musk is the notoriously blunt-smoking head of Tesla (Ticker: TSLA) and SpaceX.

After dropping nearly 18% in March, SPCE stock went on to lose another roughly 28% in April, and is testing year-to-date lows.

TSLA stock, on the other hand, is well off its February peak, but not nearly as significantly as SPCE.

And while Tesla has been attracting attention ahead of Elon Musk’s upcoming “Saturday Night Live” hosting gig …

Virgin Galactic stock has been attracting what appears to be institutional investors betting on a floor for SPCE on the charts.

So today, let’s dive into the big-money order flow that caught my eye yesterday …

Big-Money Trader Expects the SPCE Bleeding to Stop

SPCE shares peaked north of $60 in February, but have since given up about two-thirds of that to flirt with the round-number $20 level.

As a result, the stock’s 14-day Relative Strength Index (RSI) is just under 33 — on the cusp of “oversold” territory (generally considered a reading under 30).

SPCE daily chart w/ 14-day RSI – courtesy of StockCharts

Perhaps that oversold reading is why SPCE on Tuesday attracted a massive option trade betting on short-term support.

Specifically, it looks like the trader may have sold to open a little more than 7,500 contracts of the 17-strike put expiring on Friday, May 21, for 67 cents apiece, or $67 (since each option controls 100 shares).

SPCE option trade on May 4, 2021 – courtesy of Trade-Alert

For all the new kids out there, let me break this down even further:

When you BUY a put to open, you’re usually betting the stock will fall beneath the strike within the option’s lifetime.

But when you SELL a put to open, you’re taking the opposite side of the buyer’s trade.

That means you expect the underlying stock to stay above that sold strike — $17, in this case — through the option’s lifetime.

In the case of SPCE, the big-money seller will be able to retain most or all of the initial net credit received to open the trade — $67 a contract, or $503,572 ($67 x number of contracts).

Yes, as long as SPCE stock doesn’t breach $17 — territory not explored since October — in the next couple weeks, this institutional option seller can pocket about HALF A MILL.

However, put selling certainly comes with heavy risk, which would increase the steeper SPCE should fall beneath $17 by the close on May 21 (expiration day).

Even more risky? Selling options ahead of a known event — which could be a volatility catalyst — like earnings, which Virgin Galactic is slated to report on May 10.

But again, perhaps the seller thinks the recent SPCE sell-off is overdone, and that the bleeding will stop soon … or at least north of $17.

Either way, with SPCE attracting big-league money in the option pit, I’ll be keeping an eye on this one to see if it also appears on my Robinhood Trader scanner, which could put it on my short list to trade.

Enjoy the rest of your week and good luck out there!

Your Only Option,

Mark Sebastian

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