Although Rocket Lab Corp (NASDAQ:RKLB) ranks among the more exciting enterprises in the market thanks to the underlying space economy, its exposure to large-scale institutions raises questions amid the government shutdown. With narratives clashing head-on, RKLB stock is stuck in limbo, down 2% in the trailing month. Still, this overhang may represent an upside opportunity for intrepid traders.
On the fundamental side, Rocket Lab is coming off strong company-specific news. Following Monday's after-hours session, management announced a multi-launch contract with Synspective, a Synthetic Aperture Radar (SAR) satellite data and analytics company from Japan. The new contract is for 10 additional launches, bringing the total number of upcoming missions to 21.
However, the good vibes didn't last that long. In the trailing five sessions, RKLB stock is up less than half-a-percent above parity. Much of the uncertainty may be tied to the aforementioned government shutdown. It should be noted that Rocket Lab's backlog at the end of last year was nearly split between government and commercial customers.
Generally speaking, though, such impasses tend to be short-lived affair as no political party is immune to pressure. Further, because Republicans hold power, they risk bearing the brunt of the blame. But whatever the case may be, Wall Street doesn't always get spooked by Washington gridlock. As such, the dark clouds may offer an opening for RKLB stock.
Using Past Statistics To Illuminate A Path Forward
With the market generally handling the shutdown drama well, there may be a temptation to load up the boat on RKLB stock. However, this is a security that has almost doubled in value since the beginning of the year. And in the past 52 weeks, RKLB has shot up an astounding 422%. Naturally, traders are pensive about how much gas is really left in the tank — and that's where option spreads come into play.
With the spread's unique geometry — which sandwiches a debit-based transaction with a credit-based one — small movements in the open market can translate to massive payouts in the derivatives market. But options have expiration dates, which makes precision all the more important. You can't just be correct about the direction as time is also one of the critical factors for success.
Given this unique challenge, the best approach (in my opinion) is to utilize a first-order Markov chain defined on higher-order states. In colloquial language, the next behavioral state depends only on the current state.
In my interpretation of Markovian logic, I am hypothesizing that the distinctive attributes of the last 10 weeks can be instructive in understanding how the next 10 weeks may pan out. I then compare this projected performance to the baseline expectation when aggregating all outcomes in the underlying dataset.
It may sound complicated but what I'm really doing, to use a baseball analogy, is studying my players' batting averages so I know who to pencil in for my starting lineup. This process doesn't guarantee success but it helps formulate an empirical plan.
For RKLB stock, in the trailing 10 weeks, the security has printed a 4-6-D sequence: four up weeks, six down weeks, with an overall negative trajectory. On a rolling (non-independent) basis, this sequence has materialized 18 times since January 2022. In the seventh week, RKLB is profitable relative to the starting point 10 times (55.6% upside success ratio). At that point, the median price associated with the sequence is $49.09.
Basically, half of outcomes tied to the 4-6-D pattern are projected to be above $49 and half below. This serves as a key reference marker when formulating an options strategy.
Putting Rocket Lab's Data To Good Use
Based on the market intelligence above, the options strategy that arguably stands out is the 48/50 bull call spread expiring Nov. 21. This transaction calls for buying the $48 call and simultaneously selling the $50 call, for a net debit paid of $90 (the most that can be lost in the trade).
Should RKLB stock rise through the second-leg strike price ($50) at expiration, the maximum profit is $110, a payout of over 122%. Breakeven comes in at $48.90, which is a few ticks below the 4-6-D sequence's projected median price, thus providing some perceived measure of safety.
Interestingly, the "sequential" median price is actually projected to be lower than the median price of all outcomes. Ordinarily, that wouldn't be a favorable situation. However, with market makers apparently pricing their options conservatively (perhaps due to shutdown anxieties), the 48/50 bull spread appears very tempting.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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