Commercializing space travel is getting closer to reality. The only way to trade this concept on Wall Street is through Virgin Galactic (NYSE:SPCE) stock. SPCE stock is young but it has already been on several wild rides. Year-to-date it is out-performing the Nasdaq Composite index five to one.
I wrote about a bullish trade five weeks ago and then it rallied 80%. Clearly this is a momentum stock, which presents a problem to most investors. But today we will overcome that and bet bullish again.
Stocks that rally this fast are tricky to trade because they rarely give an easy entry or exit point. On the way up they seem ready to crash, and on the way down they appear headed to zero. In this case — and going into earnings — SPCE stock is vulnerable to some downside. This is not the same as saying that it is a good idea to short it because it’s not.
Over the long term, unless the company fails in its mission, the stock is headed higher especially in a bull market. The stock has hit my short-term marks I shared in a previous write up, so patience can be a good thing here.
SPCE Stock has a Strong Team Behind It
The leadership that is supporting Virgin Galactic has proven itself time and again and in many other verticals. It’s not often that billionaire investors Richard Branson and Chamath Palihapitiya fail. I am comfortable taking the leap of faith risking money alongside them. Believing in their conviction is a prerequisite to owning shares of SPCE stock this early in the process.
Since the company doesn’t have much income to report, there’s no sense of assessing its value. Buyers of the shares have to go on faith that if they build it the revenues will come. Growth stocks are hard to evaluate, much less one that is still in its formative years. Nevertheless most investors need reassurances and on that front one solution is to use options to bet on the upside. There investors can take a bullish position and leave much room for error.
There are two ways to doing this. One is to buy long-dated leap calls in SPCE stock. This has a much lower out-of-pocket risk than buying the shares outright, and locks in the bullish participation for when it happens. The second way is to sell puts below support and let time do the heavy lifting. I like this better because it leaves a lot of room for error and I don’t really need a rally to profit, and in fact, the stock can plunge and I can still win.
Get Long and Leave Room for Error
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For example, instead of buying the shares or the calls and hope for a rally, I instead sell the January $12.50 put option and collect $1.70 for it. As long as the stock stays above my strike I retain my maximum gains. This means that I would be long Virgin Galactic now but with a 45% margin of error. If it crashes this year then I break even at $10.80 per share.
Selling puts for income in this case sounds boring, but boring is beautiful when dealing with such uncertainty. SPCE stock is unpredictable on any given day, add to it that it’s headed into the earnings headline and it’s a complete gamble. The short-term reaction to those events is binary regardless of the quality of the report itself.
In my last write-up I suggested selling the January $7.50 put for $1.20. That trade is already green to almost 60% of its maximum gains. Today’s idea is a rinse-and-repeat for someone who is still looking to get long this stock. As they say that they don’t ring bells at tops and bottoms, but by using options investors don’t really need that information.
Chart Shows Reliable Support
The chart shows strong support near $18 per share. There is also stronger support near $14.30 and if that fails, there is even more through $12. There is no real reason for the bears to push it past that, because I consider the March bottom to be the worst that could happen for a long time. Shutting the whole world down is as tough a test as Wall Street can go through.
The situation on Main Street is still very dire. We have the worst economic conditions ever and record numbers of people are unemployed. Yet equity markets are still setting records and this is not normal. More evidence of the risk that looms is from the high level of the VIX.
In the case of SPCE, that fact is almost immaterial because it is by definition a speculative stock, so conviction is low and therefore sizing is important. I don’t risk an amount that will break my piggy bank or my heart when betting on unproven concepts like this one.
Virgin Galactic should eventually get competition from Jeff Bezos’ Blue Origin project or Elon Musk’s SpaceX. These two are proven disruptors and they are fighting it out hard already. Add Branson into that mix and it is so exciting just watching these entrepreneurs literally go where no other has gone before.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities.
