space x will debut this Friday under the ticker “SPCX” and its options will begin trading on Tuesday, June 16th.
The rapid turnaround has left investors a little confused. There is little sample size of time and activity to determine how the world’s biggest IPOs will trade day-to-day over the long term, and one trader says this will be the biggest hedging challenge in nearly 30 years.
“As an options trader, back in 2000 I used to do this kind of hedging for IPOs, but back then there was a whole basket of technology stocks that you could use to replicate the hedge. At least there were correlations, proxies and liquidity stocks that provided a framework for risk management,” Dennis Davitt, CIO at Milbank Dartmoor Portsmouth, told The Exchange.
Of course, there’s no real comparison to SpaceX, which will become the only publicly traded private company with a large-scale space launch business when it begins trading on the Nasdaq this Friday.
As David says, “What are you going to do, NASA?”
The need for hedging is most important to investors (often institutional investors) who own SpaceX stock through the private markets. The company’s private market valuation has nearly tripled in the past year, according to Forge data. That position then becomes a larger portion of the overall portfolio, increasing the associated risk.
Don’t expect a huge increase in prices
This complicates matters because the current market does not allow for direct comparisons with SpaceX. David has experienced similar blockbuster IPOs up close, but admits this presents unique challenges.
“This reminds me a lot of when I was working at Credit Suisse when we IPOed Google in 2004,” David says. “Back then, it was easy to hedge because there was more to sell. So when you hedge something like this, you create a basket of things that simulates price movement… But SpaceX has nothing to sell.”
In the absence of directly executable proxies or synthetic hedges, the challenge becomes expectation management.
“My gut feeling as I get older and have been through these big IPOs is that they tend not to go to 200% explosive tops,” David says. “I don’t think Elon Musk would allow this to IPO at $135 and trade up to $270 on the first day.”
But even if price movements slow, there are other pitfalls associated with other trading vehicles for holding SpaceX stock.
“I think the early SPCX market will be quite challenging for traders, which means very wide and very high IV,” Spotgamma founder Brent Kochuba told me via email.
“It’s not just the price movement of the stocks in question, it’s the creation of these leveraged ETFs, and then the forced index buying. That’s compounded by the FOMC and VIX expirations the next day (the 17th), followed by the June options expiration galore.”
