Bulls Orbit Virgin Galactic’s Huge Rally

SPCE has closed higher in 23 of the past 31 trading days

by Bernie Schaeffer

Published on Feb 19, 2020 at 7:30 AM
Updated on Feb 19, 2020 at 7:30 AM

We've continued to keep a close eye on sentiment in the markets with stocks trading at all-time highs, and lately it's been hard to ignore the rise of a few "cult" stocks in recent months. Grabbing the most headlines -- and the attention of traders on a number of social media sites -- has been Tesla (TSLA), as the shares have rocketed up the charts to record highs. But another stock has also been rising rapidly, both on the charts and in its mentions on various online forums.

I'm speaking of space tourism stock Virgin Galactic Holdings Inc (NYSE:SPCE), which has truly seen its share price "blast off" in 2020, much to the delight of all those who've gone long on the Wall Street newcomer, either through stock purchases or options trading. Taking a hard look at the charts, SPCE shares bottomed near $7 after the company's first-ever earnings report in November, when the firm said it had collected about $80 million in deposits from customer reservations for its space flights, which investors were stacking up against the company's roughly $1 billion market cap at the time.

What has happened since then? Well, let's break down the stock's performance from a few different angles:

  • Since November, Virgin Galactic stock has experienced just one negative week. In fact, its last four positive weeks go as follows: a 37% gain (as of this writing), 10.4%, 10%, and 21.9%.
  • There have been 31 trading days in 2020 so far, and SPCE has closed higher in 23 of them.
  • Trading volumes began surging on SPCE in mid-January, with more than 35 million shares traded on Jan. 22 alone. This number exceeded the volume seen on Apple (AAPL) that day, and tripled that of blue chip Johnson & Johnson (JNJ).
  • Overall, Virgin Galactic's year-to-date lead is around 120%, with the shares last seen up another 7.3% as of this writing to trade at new highs above $25, putting its market cap on the cusp of the $5 billion mark.

Likely to the surprise of almost no one, options traders have shown about as much skepticism as stock traders (none). Simply put, call buying has ballooned on Virgin Galactic during the stock's huge rise, with about 203,000 long calls crossing at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) over the past month, compared to a measly 38,126 long puts. This has translated into more than 406,000 open call positions. Put open interest, meanwhile, sits down at 146,280. As you can see on the chart below, this increase in call activity has only continued to increase.

smal cotw

Much of this build-up has occurred in the traditional February series at the 25 and 30 strikes. This is an important observation, because these contracts will expire on Friday, Feb. 21, while Virgin Galactic is set to report its second-ever earnings release the following week, after the close on Feb. 25. The question becomes will these bulls open new positions ahead of earnings (with volatility expectations already skyrocketing amid the increased demand) and extend the seemingly relentless rush for bullish bets on SPCE?

Regardless, a repeat of the November earnings performance will clearly be bad news for all those who've continued to hold the stock, namely retail investors who have joined in on this euphoric rise. From a long-term perspective, the bullish case for SPCE can still stand for those so inclined, given the unknown potential for space tourism and seemingly strong leadership in place at the company (well-known tech investor Chamath Palihapitiya remains Chairman of the Board), but in the short term, Virgin Galactic should at the least be approached with extreme caution, as the bullish side of the trade becomes increasingly popular, volatility expectations continue to rise, and attention from retail investors grows. Indeed, even trying to make a strong bet against SPCE has its risks, as upside could be met by call sellers hedging their positions by picking up the stock.

small SPCE

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, February 16.




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