How to Pull Profits out of Dead-Money Virgin Galactic

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Virgin Galactic shares have been riddled with disappointment. Sure, it’s had a few launch attempts. But ultimately, all bids to push SPCE stock into orbit have failed. Traders have a couple of choices on how to deal with the return to neutrality.

Virgin Galactic (<a href=SPCE) billboard on the New York Stock Exchange, across from the Fearless Girl statue." width="300" height="169">

Source: Tun Pichitanon / Shutterstock.com

Each path has trade-offs. After investigating them, you will be in a much better position to make an informed decision.

Take the Long View

The idea of investing in the future of spaceflight has the cool factor. But if this year’s volatility from SPCE stock is any indication, profiting from it is going to require both patience and a willingness to ride through some wicked twists and turns. If that’s not something that appeals to you, then I’d avoid Virgin Galactic for now. Otherwise, settle in, put on your seatbelt, and size small enough so you won’t get shaken out prematurely.

In other words, don’t buy so many shares that you have to put a tight stop loss. A smaller position will allow you to play the long game and not panic during the inevitable setbacks (e.g., price drops) that will arrive along the way.

Virgin Galactic (<a href=SPCE) chart showing poor earnings killing the trend" width="300" height="132">
Click to Enlarge

Source: The thinkorswim® platform from TD Ameritrade

Of course, you could wait for the stock to break free of its trading range and start trending. Ever since the Feb/March crash, SPCE has proven unable to start trending higher. If you look at what’s ultimately upended each attempt to take flight, it’s been earnings.

February and August’s quarterly reports both killed uptrends. Until the fundamentals can improve enough to support a rise in price, it seems all breakouts will be prone to failure.

Embrace SPCE Stock Options

When it comes to pulling profits from a dead-money stock, the options market provides some exciting possibilities. Traditional equity investors rely on dividends to get paid while waiting for shares to rise in price. But Virgin Galactic doesn’t pay dividends! Nor should it. The company is still in its infancy and lacks the consistent cash flow needed to support quarterly checks to shareholders.

Thus, we’re relegated to using derivatives to generate profits. Fortunately, at $17, SPCE stock offers a cheap enough price tag to make covered calls and naked puts appealing. Because the cost is minimal, the potential return on investment is high. Let’s take a look at each strategy profile and suggest how to build them on Virgin Galactic shares right now.

The Covered Call

Covered calls are a neutral-to-mildly bullish strategy. The ideal outcome, then, is to have the underlying stock tread water or rise slightly. To enter the trade, you buy 100 shares of stock and sell a short-term call option, usually with a strike price that is out-of-the-money. In exchange for selling the call, you are paid a premium, which acts as the potential profit or cash flow if the stock trades sideways. It is a limited reward trade since the short call obligates you to sell your stock if it rises above the strike price.

The Trade: Buy 100 shares of SPCE at $17 and sell the October $18 call for $1.22.

The cost basis or max loss is $15.78. The call provides the potential for $1.22 in cash flow, which translates into a nearly 8% return over the next month. But, if SPCE can rise above $18, you’ll also capture $1 in profit on the stock, lifting the max reward to $2.22, or 14%.

The Naked Put

If you’d rather not put up the capital to acquire shares of stock, you could sell naked puts instead. Typically, you sell short-term out-of-the-money puts due to their higher rate of time decay. Consider it a bet that the puts will expire worthlessly.

The Trade: Sell the October $15 put for around 65 cents.

If SPCE sits above $15 at expiration, you’ll capture the $65 profit per contract. That’s your max gain. If the stock falls below $15 by expiration, you can either allow assignment and buy shares for $14.35, or simply exit by repurchasing the put.

On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.

For a free trial to the best trading community on the planet and Tyler’s current home, click here!

The post How to Pull Profits out of Dead-Money Virgin Galactic appeared first on InvestorPlace.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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