Neither the author, Tim Fries, nor this website, The Tokenist, provide financial advice. Please consult our website policy prior to making financial decisions.
The options markets show massive interest in Richard Branson’s Virgin Galactic, countering some of the withdrawal it experienced this week. The company recently announced that the test flight for its commercial space travel would be delayed. That does not seem to have troubled the investors.
What does options trading tell us about the stock price? If anything, investors are optimistic about the company, which is competing in the booming commercial space flight scene. Let’s take a closer look at what has been happening.
Virgin Galactic’s Recent Test Flight
The test flight was scheduled to occur between November 19–23, but has been postponed until further notice. The company consulted with the New Mexico state government and decided it was the best decision for health and safety. The COVID-19 pandemic wrought havoc on the plans of businesses across all sectors, and Virgin Galactic is no exemption.
As for how the investors are behaving, the options market seems to indicate that they have a lot of hope for the stock in the long run. Options volumes for Virgin Galactic traded at roughly three times the usual amount — which is usually 100,000 contracts a day. With volumes so high, it could be that investors are hoping to cash out a profit towards the end of the year.
The stock price itself had gone down by about 5% following news of the delay — which was not a small pushback. Those who know how options function also know that it can tell us much about the fundamental value.
Options Traders Are Optimistic of Virgin Galactic
That’s certainly what Michael Khouw, chief investment officer at Optimize Advisors, seems to think. Khouw said on CNBC’s Fast Money that traders were betting on the stock to skyrocket — with pre-pandemic highs in mind. That prospect would undoubtedly make for a profitable outcome.
A number of the options calls through the top options brokers are going for a $28 valuation. Around 16,000 contracts were traded for $1. The overall impression one seems to get that investors are expecting the price to go up.
In order for the calls to meet that valuation, the stock would have to rise an incredible 27%. That’s a lot of confidence investors are putting in, with about $1.6 million being traded. But is there anything else that could buoy the stock?
A Speculative Call?
The company has logged several successful test flights and has also secured a contract with NASA. At the same time, analysts are reducing their revenue forecasts for the company by 25%. There’s definitely a conflict of views.
Virgin Galactic is the first space tourism company on the NYSE, and the stock has done well despite setbacks. The Q3 2020 report was not particularly flattering, reporting a loss of 34 cents with no revenue, and flew past analysts’ expectations of a loss of 27 cents per share.
Perhaps analysts are expecting early spaceflight sales, which are expected to start in 2021, to change these financial figures. But the fact that remains, that while Virgin Galactic has gained the attention of traders, it comes with some risk. After all, commercial space flight is an extremely new industry, and anything could happen.
Keep the fact that it is a somewhat speculative call option on the parts of options traders. Options trading can be risky, which is why some prefer binary options, but it can also be a good hedge. It’s worth examining the Virgin Galactic’s options trading, if for learning how it works and nothing else.
In any case, Virgin Galactic remains one to keep an eye on. The company’s spaceflight could be promising, and the overall industry looks like it’s kicking off in this decade. Whether the stock hits investors $28 calls will offer interesting insight into the company’s development.
Where do you see the Virgin Galactic stock next month? What does the options activity tell you? Let us know in the comments below.
Disclosure:Tim Fries has no positions in any of the stocks mentioned, and has no plans to initiate any positions within the 72 hours following the publishing of this article. This article expresses the opinions of Tim Fries. Tokenist Media LLC has no position in any of the stocks mentioned, and does not plan to initiate any positions within 72 hours of the publishing of this article. Please consult our website policy for more information.
Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Baird's US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.