Out-of-This-World Options: 3 Larger, Diverse Spread Trades in Rocket Lab Stock

Lift-off, stall, or crash. For bullish and bearish Rocket Lab (RKLB) investors alike, tracking RKLB stock’s largest spread trades and monitoring its “EM,” or its expected move, makes for a smart mission-ready combination. 

Space, the final frontier. But it’s less science fiction these days. And amongst leaders like Lockheed Martin (LMT), GE Aerospace (GE), and RTX Corp (RTX), Rocket Lab is an up-and-coming player. 

About Rocket Lab 

RKLB is described as an end-to-end space company.

From launch services to satellite components and the development, manufacturing, and operation of spacecraft and both small and medium-lift rockets, Rocket Lab is reaching for the stars. 

And Wall Street loves what Rocket Lab does, as well as RKLB stock.

Based on coverage from 18 analysts, Rocket Lab’s correction of 36% over the past two-plus months equates to a launch pad of sorts for investors to hop safely on board. 

A consensus low price target of $68 is nearly $2.00 higher than Tuesday’s closing price of $66.07. No downside! Not quite. 

Still, the average estimate calls for RKLB shares to reach $90.50.

And if Rocket Lab shares do reach Wall Street’s mean estimate, that’s an attractive return of 37% .

Meanwhile, one analyst is calling for an upward trajectory of 99.8% to $120 over the next 12 months.

RKLB Bull Call Spread

A quick peek at Rocket Lab’s Options Flow data uncovered a bull call vertical spread as the largest activity in Tuesday’s session.

By sorting for premium and the single biggest dollar transaction, we can see that two of three 999 contract trades were put up at the same time in the June $70 call and June $80 calls. 

In all likelihood, the two trades combine to form a limited risk call vertical spread.

What isn’t known is whether the initiating party is a bullish buyer of this vertical or a more neutral to bearish investor. 

Still, in appreciating some of Wall Street’s price target enthusiasm, as well as a sizable, but common correction within a larger weekly bullish uptrend, the spread buyer has a couple ancillary supports. 

Another positive for potentially profiting from this June bull call spread is the required flight path in RKLB stock.

In order to maximize the vertical’s profit potential of $6.72 ($10 strike width - $3.28 debit) above $80, shares of Rocket Lab can remain favorably inside of the stock boundaries of what option traders are collectively pricing in through June expiration. 

As Barchart’s Expected Move page indicates, an EM of 28.55% through the vertical’s June expiration is being priced in by the options market vis-à-vis implied volatility levels. 

And at the end of the day or rather come that third Friday, a RKLB stock move as high as $84.93 would be more par for the course versus an unexpectedly larger rally to maximize this spread’s profits as a bull. 

You can learn more about the Bull Call spread strategy here.

RKLB’s Real Largest Spread Activity

It turns out a quick peek at RKLB’s largest transactions was a bit misleading. 

And traders aren’t finished yet either.

A more thorough investigation of RKLB’s Options Flow data shows spreads totaling just north of 1,400 in April on the $50 put and $85 call strikes. 

The activity could be found throughout the session in 200 lot transactions and a couple slightly smaller deals. 

Also, remarkably similar 200 contract spreads in May on the $50 put and $95 call hit the tape twice before calling it good for the day.

What isn’t entirely clear is what type of spread this is. 

Unlike the rather straightforward earmarks of a vertical and having a buyer who is bullish and a seller that’s less optimistic, these transactions could reasonably be a couple of spreads. 

RKLB Strangle

The more common put and call combination is the strangle, wherein both options are either sold or purchased and expire in the same month. 

Here, and due to the selected strikes and an April expiration cycle, the strangle seller has the theoretical advantage.

Referencing RKLB’s EM data once more, an average spread price of approximately $1.95 on the roughly 1,400 April $50 put - $85 calls could be collected in its entirety if shares remain within the expected range of $55.32 - $76.82. 

In fact, the full credit could be received quite comfortably based on options traders’ expectations given the sold put is 10% beneath the range low and the sold call 11% above the range high.

You can learn more about short strangle spreads here. 

RKLB Stock Collar?

Put and call combinations in the same contract month aren’t always about simply buying or selling premium. 

There is the collar strategy to consider. 

This protective spread purchases the put for insurance to hedge a long stock position. A sold call completes the package and helps finance the spread’s cost. 

Synthetically, the collar offers the same risk-to-reward profile as a bull call spread with both gains and losses capped. 

Importantly, while a collar is most often established or referred to as a single transaction, that’s not always the case. 

There’s nothing to prevent a RKLB stock investor that’s already long shares from initiating the long put and short call at a different point in time. Like in Tuesday’s session. It’s a possibility.

Rocket Lab’s Risk Reversal?

Lastly, there’s the risk reversal to consider. 

With a risk reversal, the investor forgoes a stock position entirely. This spread involves just a bought and sold combination of the put and call. 

If the put is bought and the call is sold, i.e., a collar without the stock, the investor has established a short risk reversal. 

As both options components are bearish, the most obvious path to profits is if RKLB stock begins to fail and crater lower.

But with the unearthed April transactions amounting to an approximate spread credit of $0.25, the investor will also make a small profit if shares simply remain inside Rocket Lab’s expected move into expiration.

The bottom line is that if this bear is really a passenger in RKLB stock, with open-ended risk on a less-calculated, moonshot-style move higher, a plan to abort their mission is critical in order to avoid significant real world losses.