Virgin Galactic (NYSE:SPCE) took flight last month, and it has officially reached orbit. The current rally has succeeded where all its predecessors, at least those that cropped up after the novel coronavirus pandemic, failed. With that, SPCE stock is at a fresh nine-month high and arguably poised for more upside.
Let’s unpack the growing number of bullish arguments and why options provide such an attractive avenue for profits. Along the way, we’ll look at multiple time frames to build a comprehensive case. Specifically, we’ll progress from the weekly to the daily to the hourly. Upon completion, you’ll agree bulls maintain the upper hand.
The Big Picture
Previous to 2020, Virgin Galactic shares were dead in the water and completely off anyone’s radar. But with the turn of the year came a sudden awakening. Buyers’ excitement went bananas, and the stock soared from $10 to over $40 in six weeks. Unfortunately, the enthusiasm dissipated as fast as it arrived. Fast forward a single month, and the entirety of the gains completely unraveled, pushing SPCE stock into negative territory for the year.
Since then, it has been a massive shoving match that has seen bulls gradually gain the advantage. Note the subtle series of higher pivot lows forming. These hint at a minor increase in demand with each subsequent pullback. But now, spurred by a run for the ages in small-caps, buyers have been unleashed. Over the past five weeks, prices have climbed 60% and blasted through every resistance zone save one.
While it doesn’t have to revisit the February peak anytime soon, the stage is certainly set for that eventuality if the fresh uptrend continues.
Move Closer
Drilling down to the daily view provides more detail to the recent ramp. The sudden shift is pulling the 20-day moving average higher at a faster pace than the 50-day. As the two smoothing mechanisms separate, it provides further proof that momentum is kicking into high gear. You can also more clearly see how we’ve taken out the old July peak. If that’s not an indication that the old range is dead and SPCE stock is ready to climb higher, then I don’t know what is.
The potential anchor that could ultimately pull prices back to Earth is earnings. The history of quarterly reports isn’t great. We’ve seen recovery attempts and bullish bids to jam SPCE stock higher, but ultimately they’ve all failed due to lackluster sales. The next announcement doesn’t crop up until early-February, so bulls do have some runway to keep the party hopping. But if earnings arrive and remove the punch bowl, don’t say I didn’t warn you.
Even Closer
This technical analysis adventure ends on the hourly chart. It shows an uptrend, complete with a rising 50-period moving average. But here’s where the bullish argument suffers a misstep. Momentum is slowing, and the trend is beginning to neutralize. Given the magnitude of the recent rise, some consolidation is certainly warranted. But it does throw cold water on new long trade ideas in the short run. I prefer to wait and let the selling pressure exhaust itself or build a higher probability options trade that allows for some chop.
My Favorite SPCE Stock Options Trade
When it comes to building a high odds trade on a sub-$30 stock, naked puts are the first play that comes to mind. And, in this case, it’s particularly tempting given Virgin’s volatile temperament. The higher implied volatility allows us to sell far out-of-the-money options and still capture hefty premiums.
If you’re comfortable betting the stock sits above $20 in six weeks, then sell the Jan $20 put for around 85 cents. The initial margin should only be around $200. With the max profit at $85 per contract, this translates into a tasty potential return.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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