SpaceX Stock Dropped 34% From Its High. This Trade Pays You to Bet It Stays There.

SpaceX (SPCX) just joined the Nasdaq-100. But apparently, the inclusion wasn't enough to revive the hype.

The stock has fallen 34% from its high of $225.64, and many say the piping-hot excitement for Elon Musk's newest public company is waning.

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At this point, investors are shifting their focus from that initial excitement to the company's fundamentals and valuations. And with a market cap just under $2 trillion, SpaceX is officially the most expensive company in the world that has nothing to show for it on the bottom line - ironically right next to Tesla in the second-to-last position of the recent quarterly income ranking.

So, if you're one of the people who believe SpaceX is overhyped, how do you actually turn that outlook into a trade?

Bear call spreads are used when you expect a stock to remain below a specific price level. The strategy involves selling a call option at a lower strike price for which the seller receives a premium, and buying a call option at a higher strike price for which the investor pays a premium. These are all done on the same underlying asset with the same expiration dates.

The difference results in a net credit, which is why it's also called a call credit spread.

If the underlying stock stays below the lower short strike by expiration, you get to keep the entire net credit without further obligation. If the stock ends between the short and long strikes, the trade ends at a partial profit or loss, depending on how close it is to the relevant strike prices.

However, if the stock trades above your long strike at expiration, your trade ends with a maximum loss equal to the distance between the strike prices (the spread width) minus the net credit you received.

For this reason, bear call spreads typically start out of the money, i.e., with the short strike price already higher than the stock trading price.

Before we proceed with finding bear call spreads on SpaceX, I need to cover volatility.

Volatility is a measure of the magnitude of a stock's price movements over a given period. Option traders typically look at implied volatility, which reflects future expected price movements.

Volatility is a key concept when selling options because it directly affects option premiums. Higher volatility means higher premiums, which means more income potential when using strategies like bear calls.

However, volatility cuts both ways. With higher expectations for large price swings, there is also a greater chance that your bear call will expire in the money. That's the tradeoff when you're selling high-volatility options - more income equals more risk.

But there is a way to mitigate that: sell options when volatility is high but falling. And that's something you typically expect when the world's biggest IPO winds down.