spacex This will debut this Friday under the ticker ‘SPCX’ and its options will begin trading on Tuesday, June 16.
It’s a quick turnaround that leaves investors a little confused. They will have too little time and a small sample size of activity to assess how the world’s biggest IPO will trade day-to-day over the long term, which one trader says will present the biggest hedging challenge in nearly three decades.
“As an options trader, we used to do a lot of this kind of hedging around IPOs in 2000. However, at that time, there was a whole basket of technology stocks that you could use to replicate a hedge. There were correlations, proxies and liquid names that at least gave you a framework for managing risk,” Milbank Dartmoor Portsmouth CIO Dennis Devitt says on “The Exchange.”
Of course, there’s no real comparison to SpaceX, which will be the only publicly traded private sector company operating in the large-scale space launch business when it begins trading on the Nasdaq this Friday.
As DeWitt says: “What are you going to do, Mini NASA?”
The need for hedging is paramount for investors – often institutional – who own SpaceX equity through private markets. The company’s private market valuation has nearly tripled in the past year, according to Forge Data. When this happens, the associated risk increases as the position becomes a larger portion of one’s overall portfolio.
Don’t expect a huge surge
This is where the lack of direct comparison to SpaceX in the current market makes things tricky, and while DeWitt has experienced similar blockbuster IPOs up close, he admits this one is a unique challenge.
“It reminds me a lot of when I worked at Credit Suisse in 2004 when we did the Google IPO,” says DeWitt. “It was easier to hedge at the time because there were more things to sell. So when you put a hedge together on something like this, you create a basket of things that simulates the price action… but there’s nothing to sell in SpaceX.”
In the absence of directly actionable proxies or synthetic hedges, the challenge becomes expectation management.
“My instinct, being older, and having been around these big IPOs, is that it’s not a 200% shock top,” DeWitt says. “I don’t believe Elon Musk will allow the IPO to trade at $135 and up to $270 on the first day.”
But even if the price action is muted, there are other disadvantages related to other trading vehicles holding SpaceX equity.
“I think the early SPCX markets are going to be quite challenging for traders, which means super wide and very high IV,” Brent Kochuba, founder of Spotgamma, told me via email.
“Not only is the stock price action in question, but you have these leveraged ETFs that are going to be launched, and then forcing index buying. Compounding that is the FOMC meeting and VIX expiration the next day (the 17th), followed by massive June options expirations.”
