SpaceX IPO hedging challenge Wall Street: ‘short nasa?’
SpaceX It will launch this Friday under the ticker ‘SPCX’ and options will begin trading on Tuesday, June 16.
That’s a quick reversal that leaves investors in a bit of a pickle. They will have little time and a small sample size of activity to decide how the world’s largest IPO will trade on a day-to-day basis over the long term; One trader says this will present the biggest hedging challenge in nearly three decades.
Millbank Dartmoor Portsmouth CIO Dennis Davitt says on “The Exchange”: “As an options trader, we used to do a lot of these types of hedges around IPOs in 2000. But at the time, there were a number of technology stocks available that you could use to replicate the hedge. There were correlations, proxies and liquid names that at least gave you a framework to manage risk.”
Of course, there’s no real comparison to SpaceX, which will be the only publicly traded privately held company operating at scale in the space launch business when it starts trading on Nasdaq this Friday.
In Davitt’s words: “What are you going to do, NASA in short?”
The hedging requirement is crucial for investors (mostly institutional) who own SpaceX shares through private markets. The company’s private market valuation has nearly tripled in the past year, according to Forge data. When this happens, the risk involved increases as the position becomes a larger portion of one’s overall portfolio.
Don’t expect a huge increase
This is where the lack of direct comparison to SpaceX in the current market makes things difficult, and while Davitt has experienced similar blockbuster IPOs up close, he admits it’s a unique challenge.
“This reminds me of my days working at Credit Suisse when we took Google public in 2004,” Davitt says. “Back then, it was easier to hedge because there was more to sell. So when you put a hedge on something like that, you create a basket of things that simulates the price movement… but there’s nothing to sell on SpaceX.”
In the absence of directly actionable proxies or synthetic safeguards, the challenge becomes expectation management.
“Being older and having been in larger IPOs like this, my instinct is that this isn’t going to be a crazy 200% explosion,” Davitt says. “I don’t believe Elon Musk would allow this to go public at $135 and trade up to $270 on the first day.”
But even if price action is muted, there are other pitfalls with other commercial vehicles holding SpaceX equity.
“I think the first SPCX markets will be quite challenging for investors, meaning super-wide and very high IV,” Spotgamma Founder Brent Kochuba told me via email.
“Not only is the price action of the stock in question, but there are leveraged ETFs that will be launched, and then there is mandatory index buying. The combination of these is the FOMC meeting and the VIX expiration the next day (on the 17th), followed by a massive June options expiration.”
