SpaceX Options
SpaceX’s IPO is scheduled for this Friday, June 12th and is the most anticipated financial event so far this year. Along with the upcoming Anthropic and OpenAI IPOs, SpaceX is either a confirmation of market exuberance for space, satellites, and AI-related themes or a harbinger of an irrational bubble about to burst. Either way, the three IPOs total an estimated $2.65 – $3.1 trillion in valuation, which is slightly below the GDP of France.
Regarding SpaceX, its implied valuation is currently projected at $1.77 trillion, assuming $135/share and a $75 billion raise. That would make it the world’s 9th largest company right out of the gate. Not bad for a company with a price to sales ratio of 94X and operating at a net loss. SpaceX supporters dismiss the losses as due to massive R&D spending and point to the company’s $28.5 trillion addressable market (as per the prospectus; $26.5 comes from the AI market alone), lead in the space and connectivity businesses, and Elon Musk’s track record in bringing new and daring technologies to market. Of course, he has his detractors as well and brings a host of possible governance issues, but the Musk cult tends to ignore them.
The debate on SpaceX’s proper pre-IPO valuation will be settled once and for all this Friday (finally!). Since it contains an abnormally large retail allocation (up to 30% according to some sources, although I suspect actual allocations to individual investors will be much less) and there is massive uncertainty regarding its valuation, the first few trading days could be volatile as the stock attempts to find a trading range.
Given the uncertainty involved, SpaceX seems to be a great fit for options trading. But, not so fast! The Options Clearing Corp normally requires a few trading days to allow liquidity and price stability to develop before allowing options to begin trading. With the IPO scheduled for June 12th, options should begin trading between June 17th and the 19th.
However, even if you wait until next week to begin trading SpaceX options, you may not want to. As you would expect, options related to IPOs with extremely limited underlying price data are priced extremely high to account for their extra risk. In an ideal world, a price history would be available from which an historical (realized) volatility could be calculated. From there, the market maker would add a subjectively derived spread to arrive at an implied volatility. If a price history doesn’t exist, as in the case of an IPO, the market maker simply prices the options high enough to take into account whatever (within reason) might occur. Often, this turns out to be over 100% implied volatility – until vol crush brings it down to earth.
In the case of SpaceX, and given the massive uncertainty involved, I suspect that triple-digit implied volatility will be present during the first few trading days. To put that into context, let’s calculate the daily price range if SpaceX implied volatility debuts at 135% (a rough estimate/guess based on other tech IPOs) with the stock at $135. To do that, use the following formula:
Daily Volatility = Annualized Implied Volatility / SQRT (252), or 8.51% daily volatility. Multiplying the daily return by $135, you get an implied daily expected price range of +/- $11.48, or 1 standard deviation. That assumes a normal distribution, which is questionable. Using a log normal distribution instead, which eliminates the possibility of negative prices, the expected daily range would be -10.99 to +$12.01.
However you slice it, 8% + daily returns and 135% implied volatility are extremely high and usually don’t last that long. In the case of IPOs, they are the result of an information vacuum in which trading ranges, volume, and participation are unknown. As information suddenly becomes available, post-IPO vol crush can occur and triple-digit volatilities tend to collapse. That could be the fate of SpaceX options in the early days of trading.
If the SpaceX IPO seems to capture both the promise and excess of today’s AI-driven market, and perhaps even of our current society, consider this: this Friday, Elon Musk could become the world’s first trillionaire and will be about 1,000 times wealthier than someone with “just” one billion. If Musk were a country, his worth would rank 21st by GDP. To put that in perspective, if his entire wealth were held in cash (obviously, it’s not) and earning 5% interest, Musk would be making about $5.7 million per hour.