SpaceX options debut pulls record demand as investors chase rocket stock (updated)

Space Exploration Technologies

Tue 14:54

Some 1.8 mln contracts traded, Trade Alert data showed
Bullish flows dominate; calls outpace puts by 1.3-to-1
SpaceX options ranked as third-most heavily traded individual-company contract
Updates trading data throughout, adds formal title with comment in paragraph 3; adds comment in paragraphs 15-16
By Saqib Iqbal Ahmed and Laura Matthews

    NEW YORK, June 16 (Reuters) - Trading in SpaceX SPCX.O options kicked off with record volume and bullish activity dominating on Tuesday, underscoring strong investor demand for a new way to bet on the future of Elon Musk's aerospace company.

        Some 1.8 million SpaceX contracts traded on Tuesday, handily surpassing Meta Platforms' META.O — then known as Facebook — options debut in 2012, which held the previous first-day volume record of about 365,000 contracts, according to Trade Alert data.

        "We've never seen anything like it," said Henry Schwartz, vice president of derivatives market intelligence at Cboe Global Markets.
While SpaceX options were expected to be popular, the trading volume was still "impressive," Schwartz said.
In dollar terms, about $2.8 billion worth of SpaceX options premium was traded.
"Early option volume indicates another SpaceX success," said Seth Hickle, chief investment officer at Mindset Wealth Management.
Options give the holders the right, but not the obligation, to buy and sell shares of the rocket and spacecraft manufacturer at a predetermined price within a set time period. They offer investors a low-cost way to gain exposure to a company's stock and can be used to hedge against risk or to speculate on price movements. 
 "Investors continue to chase upside in high-beta AI and space-linked winners," said Chris Murphy, co-head of derivatives strategy at Susquehanna, a market maker, noting the heavy options flow in SpaceX.
SpaceX calls led puts 1.3-to-1, according to Trade Alert data.
Calls give the buyer the right to purchase a stock at a set price by a specific date, while puts give the buyer the right to sell at a set price.
The options demand was skewed toward bullish calls, Brent Kochuba, founder of options analytic service SpotGamma, said, adding that it likely helped to lift the stock early in the session. 
A surge of options volume can at times cause the underlying stock price to swing as options dealers, who facilitate trading by taking the other side of options trades, buy and sell shares to square their own risk.
Dealers who may have sold SpaceX call options would need to buy increasing amounts of SpaceX shares to guard against the shares rising, pushing the stock higher — a dynamic known as a gamma squeeze.
Tesla, another options market darling, has been known to experience gamma squeezes, analysts said.
One trade that stood out on Tuesday was the purchase of a large hedge in September contracts, which would guard against the stock slipping below $205 by September. The stock was last at $201.80.

        Given the timing, the trade likely reflects downside protection ahead of the release of certain shares from IPO lock-up in August, Susquehanna's Murphy said.
     
HEAVY DEMAND
SpaceX options were the third-most heavily traded contracts on individual companies on Tuesday, topped only by Tesla TSLA.O and Nvidia NVDA.O, Trade Alert data showed.
The robust showing in SpaceX options follows a strong stock market debut on Friday when shares of the company surged more than 25%.
The options flow on Tuesday looked primarily retail-driven, based on the exchange's trading data, Cboe's Schwartz said. 
Rocky Fishman, founder of Asym 500, a firm that provides data and analytics on the options market, said SpaceX was "on track to develop one of the deeper derivatives ecosystems of the single stock market."
"High equity volume, an overlapping investor base with option-heavy Tesla, and hedging demand are all reasons to expect very high SpaceX option volumes from the start," Fishman said in a note.
SpaceX shares climbed more than 14% on Tuesday, lifting its valuation past Amazon.com and briefly above Microsoft to rank it among the five most valuable companies within days of the blockbuster debut. 

 (Reporting by Saqib Iqbal Ahmed and Laura Matthews in New York; Editing by Chizu Nomiyama, Rod Nickel and Edmund Klamann)
 ((saqib.ahmed@thomsonreuters.com; @SaqibReports; +1 332 219 1971; Reuters Messaging: saqib.ahmed.thomsonreuters.com@reuters.net/))