Why Virgin Galactic Is Rocketing
Virgin Galactic got the casino treatment yesterday, up 30% from Friday’s close, before finishing down 19% from its same-day peak. Ten, nine, eight, seven, six. Oh, are we going already?
Long-term bull and bear cases are hard to fashion for a space tourism company. Branson’s start-up takes paying customers on orbital flights around Earth and is working towards commercial hypersonic travel. However, beyond Elon’s SpaceX and Jeff Bezos’s BlueOrigin (both non-listed), we don’t know the extent of competition, possible growth rates, profit margins, or risk factors.
Revered analyst Adam Jonas studies the firm full-time, and he says that in order to understand what’s behind this week’s rally, we need to think short-term and technical.
Instead of going out and buying shares normally, traders can use options to try and make even more money from price movements. Heading to the derivatives market and buying a ‘call’ options contract will set you back a small, non-refundable premium upfront. However, it buys you the handy option of getting into a stock at an agreed price in the future.
If the stock falls below the agreed price, you probably won’t decide to ‘exercise’ your option. The premium is wasted money, and that’s the end of it. But if the stock goes up and over the agreed price, you probably will sell or exercise your option, and the person who wrote and sold it to you will feel a little bit silly.
That investor was bearish on the stock, not bullish. They didn’t expect a higher peak, and now they’re contractually obliged to sell shares to you at an under-market rate. Bears are usually willing to take this kind of gamble so long as bulls are equally willing to pay the biggerpremiums, but wherever there’s volatility, there’s a need for risk management.
Most of Virgin Galactic’s options writers don’t swim naked. From the get-go, they purchase a portion of shares on the open market to control their bearish exposure. That’s part of the reason why Virgin Galactic has turned into such a vomit comet in markets. Even the bears are buying!
Of course, the payday in premiums will be huge, if and when Branson’s rocket runs out of fuel. Dramatic data from S3 Partners suggests a third of all investors are indeed selling short, adamant this rally is all froth and bubbles. A manic market sees no upper limit to something like space, so neither side looks ready to back down.
Virgin Galactic could be in for more of the same unless analysts step in give overboard bulls cold feet on the stock. Assuming they don’t buckle before the short-sellers (whose losses are mounting up by the double digits every day), this thing could keep running higher. It could even “turn into a Tesla” until a spectacular, supernova-like ‘short squeeze’ kills Virgin Galactic’s star performance once and for all.
Are you blasting your money into space?
