SpaceX options volume explodes as trading kicks off. Here is a low-risk strategy to play the massive surge.

By Lawrence G. McMillan

This pro-level move minimizes out-of-pocket costs and helps manage risk

SpaceX employees celebrate the market close after the company's IPO at the Nasdaq Marketsite on June 12.

SpaceX (SPCX) options trading began this week and, as expected, volume has been huge. Implied volatilities are extremely high as well. On Wednesday, for instance, the composite implied volatility (a weighted calculation using the implied volatilities of individual options - giving more weight to near term at-the-money options) was 93%. That is lower than it was the first day, as traders are tempering their expectations for volatility from this stock.

A lot of different strategies could be used, but we are going to recommend a fairly low-risk one with some reasonably good upside profit potential. This is a strategy that we have recommended before on other stocks - the "broken-wing butterfly."

In a butterfly strategy, one buys the lowest-strike call and the highest-strike call and sells an equal number of calls in the middle strikes. Thus, there are no naked options and the upside risk is small or even nonexistent in some cases. The butterfly is usually established for a debit, so that debit is your risk.

Here is the recommended spread:

Buy 2 SPCX (July 17) 250 calls

Sell 3 SPCX (July 17) 300 calls

Buy 1 SPCX (July 17) 335 call

For a debit of $350 or less for the whole spread.

The risk is the $350 debit you've paid for these out-of-the-money call options. If SPCX is below $250 at July expiration, that risk will be realized. Since SPCX is currently near $190, there is a substantial chance of realizing that loss.

The following graph shows the profit potential of this spread at July expiration:

From $250 up to $300, the two long SPCX (July 17) 250 calls are making money. At expiration, if SPCX is exactly at $300, those two calls will be worth 50 points each and the other calls will expire worthless. That means the position would show a substantial profit of $9,650.

If SPCX continues higher, those two options will continue to profit, but at that point there will be three in-the-money short SPCX (July 17) 300 calls against them. That is a net of one short call, so for the next 35 points to the upside - up to $335 - the position will be losing $100 per point. By the time SPCX gets to 335, your profit is $6,150, which is $3,500 below the maximum profit at $300.

If SPCX continues even higher, it is no problem since the one long SPCX (July 17) 335 call prevents any further erosion of the profit to the upside.

Butterly spreads won't mark at their maximum profitability until quite close to expiration, but if SPCX does rally during the life of the position and rises above $250, the spread will likely show some profit. At expiration, the profits shown in the graph above will materialize.

I encourage you to experiment with different strikes. If you use lower strikes, the debit increases, but there is a better chance that SPCX will rally into the profit area by expiration. As it stands with the above spread, SPCX would have to rally substantially just in order to get to a price of $250.

The S&P 500 is stuck in neutral, but these market indicators are shouting 'buy'

The S&P 500 index SPX has bounced back from its brief correction but has not yet recovered to test its all-time high. As a result, the SPX chart itself is in a neutral state right now - bound by resistance at 7,600 (the all-time high) and support at 7,257 (last week's lows), with further support in the 7,050-7,175 range from late April.

Intraday realized volatility remains strong, as news has triggered some large intraday moves. The most recent was the Federal Open Market Committee meeting yesterday (rates were unchanged, but traders sold anyway), followed by buying overnight (as other traders apparently had a different opinion of Fed Chair Kevin Warsh's speech).

The McMillan Volatility Band (MVB) remains in effect. The "modified Bollinger Bands" (mBB) have widened because of the aforementioned increase in realized volatility. The -4<SIGMA> Band (target) is below 7,200, while the +4<SIGMA> Band (stop-out) is at 7,800.

Many of our indicators are taking on a more positive tone, except for the equity-only put-call ratios, which continue to rise. It's bearish for the stock market when these ratios are trending higher. It seems that traders are buying stocks but are also buying puts for protection. The increase in put volume pushes these ratios higher.

Market breadth continues to be a split: That is, New York Stock Exchange breadth has been stronger than "stocks only" breadth. As a result, the NYSE breadth oscillator has remained on a buy signal. "Stocks only" breadth joined in this week when it finally issued a buy signal of its own. After two days of negative breadth, the "stocks only" breadth oscillator is still clinging to a buy signal, while the NYSE oscillator is solidly in the bulls' camp.

The cumulative total of daily advances minus declines has been strong enough to register new all-time highs for both "stocks only" and NYSE data, as of June 12 and 15. What's noteworthy is that cumulative-volume breadth has not made new all-time highs. Often, it's the other way around. But last week's sharp 5% correction was heavily concentrated in high-volume tech stocks, and so cumulative volume fell back sharply and has not regained enough to make new all-time highs.

New 52-week highs on the NYSE continue to run at a heavy pace - more than 100 per day for the past seven trading days in a row, which is keeping this indicator bullish until new lows outnumber new highs for two consecutive days.

The Cboe Volatility Index VIX retreated to 16 this week - low enough to generate a new trend of VIX buy signal for the stock market. As long as VIX is trending lower, that is positive for stocks. This new signal will remain in effect until VIX closes above its 200-day moving average for two consecutive days.

The other buy signal from VIX is the "spike peak" signal that was issued last week. It remains in effect for 22 days from its inception, unless stopped out by VIX closing above that peak at 23.34.

The construct of volatility derivatives has remained steadfastly bullish all month. Even when SPX pulled back, the term structures of the VIX futures and of the Cboe Volatility Indices continue to slope upwards. July VIX futures are now the front month (June expired this week), so we will be watching the prices of July and August VIX futures for any early signs of trouble. That trouble would occur if July futures began to trade at a higher price than August. That is not the case now, so this indicator remains solidly in the bullish camp for stocks.

In summary, we have seen an improvement in our indicators, with several new confirmed buy signals in the past seven trading days. If SPX can break out to new all-time highs and hold that ground, its chart will shift out of neutral. Meanwhile, the Dow Jones Industrial Average DJIA is reflecting the positive breadth on the NYSE. We will trade confirmed signals as they occur and continue to roll deeply in-the-money calls up to higher strikes.

New recommendation: Trend of VIX buy signal

As noted above, there is a new trend of a VIX buy signal in place. When VIX is trending lower, that is bullish for stocks. Our definition of VIX trending lower is that both VIX and its 20-day moving average are below its 200-day moving average. That is the case now, so a new buy signal is in place.

Buy 1 SPY (July 17) at-the-money call and sell 1 SPY (July 17) call with a striking price 20 points higher.

This buy signal will remain in effect until VIX closes above its 200-day moving average for two consecutive days. Currently the 200-day moving average of VIX is at 18.70 and rising slowly.

Follow-up action:

All stops are mental closing stops unless otherwise noted.

We are using a standard rolling procedure for our SPY SPY spreads: in any vertical bull- or bear-spread, if the underlying hits the short strike, then roll the entire spread. Roll up in the case of a call bull-spread and roll down in the case of a bear put-spread. Stay in the same expiration and keep the distance between the strikes the same unless otherwise instructed.

Also, for outright long options, roll if they become 8 points in-the-money.

Long 1 BKR (BKR )(July 17) 65 call and long 1 BKR (July17) 60 put: Roll the call up at $75 and roll the put down at $50.

Long 2 expiring MHK (June 18) 105 calls. Roll to the MHK (July 17) 105 calls: Hold these calls as long as the weighted put-call ratio of MHK (MHK) remains on a buy signal.

Long 1 BNS (Sept. 18) 75 put and 85 call: The 75 call was rolled up to the 85 strike this week, when BNS (BNS) traded at $85. Now, sell the put and begin to use a trailing closing stop at $83 for the calls.

Long 2 expiring USO (June 18) 100 puts and short 2 USO (June 18) 90 puts: These puts expired worthless.

Long 2 expiring RTX (June 18) 180 calls: Roll to the RTX (July 17) 195 calls: Hold as long as the weighted put-call ratio for RTX (RTX) remains on a buy signal.

Long 2 IR (July 17) 80 calls: These calls should have been rolled up when IR (IR) traded at $80 on June 17. We will hold as long as the weighted put-call ratio for RTX remains on a buy signal.

Long 8 CLOV (July 10) 4.5 calls: Stop out if CLOV (CLOV) closes below $4.

Long 1 SPY (July 17) 757 call and short 1 SPY (July 17) 782 call: This spread was rolled up this week when SPY traded at $757. The position will be held until new lows outnumber new highs on the NYSE for two consecutive days.

Send questions to: lmcmillan@optionstrategist.com.

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06-18-26 1736ET