[Options] To Da Moon!?

Sean McLaughlin
December 9, 2020

Few things take the mind on a flight of fancy like the thought of interstellar space travel. Who hasn't taken a look at the night sky and wondered what's up there?

Richard Branson took a look and wondered the same thing. Only, he decided to try to make it happen. Enter: Virgin Galactic, a company looking to open up space for recreational travel.

Investors seem to be willing to bet along with Sir Branson that humanity with believe space travel is a worthwhile exploration. This chart here shows $SPCE on the verge of emerging from a 10-month base. And as JC often says: "The bigger the base, the higher in space!" And that couldn't me more appropriate than here.

I'm liking this setup and the options market is offering us a nice opportunity to participate in the launch. And today's afternoon selloff is giving us a nice chance to enter in a pullback.

Here's the Play:

I like a $SPCE April 35/40 Bull Call Spread for $1.35 or cheaper. This means being long 35 calls and short an equal amount of 40 calls for a net debit. This debit represents the most that can be lost in this trade. I chose these strikes because each offers the most open interest in April.

Here's how the P/L graph of this trade works out:

You can see that our gains our capped at expiration above $40/share -- which corresponds with our short call strike.

While it would be nice to capture that maximum gain, I'm only interested in tactical profits. I'll be looking to exit this spread for a profit at $3.20. This would represent capturing a little more than 50% of the maximum possible profit and more than a doubling of my invested capital. I'm not interested in risking my open profits in a stretch to catch every last dime in the trade. Let somebody else sweat it out all the way to expiration. I'll take my profits and move on as soon as possible.

If we experience a failure to launch, I'll be watching for $SPCE to close below $25.50 per share as my signal to exit the position. This would be enough confirmation to me that we're too early for the move to new highs. I'll close the position for whatever is left in the spread (if anything) and save my rocket fuel for the next window of opportunity.

All Star Options subscribers with any questions on this trade, please send them here.

~ @chicagosean

We do directional options trades, leveraging All Star Charts' best in class technical analysis multiple times per week. Try it out All Star Options risk free!

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