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Option Strategy: Bull Call Spread On IPOF

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  • Choosing the right SPAC is nine tenths of the battle. I have narrowed in on Social Capital Hedosophia Holdings, led by former Facebook executive Chamath Palihapitiya.
  • Limiting downside is the most important factor in allowing an option trade to run to its maximum upside. I have chosen SPACS trading near their lower bound of $10.
  • A Bull Call Spread is the perfect trading vehicle to marry up with the likely trading range of a SPAC prior to merging with a target.

IPOs vs. SPACs

I have been intrigued with the idea of an Initial Public Offering (IPO) for a long time, and have simultaneously been frustrated with the idea that the opportunity to "get in on the ground" floor is reserved only for the ultra wealthy. Watching IPO after IPO start trading on opening day way above the forecasted fair market price is annoying to watch, knowing it is nearly impossible to get in on the action prior to "the whole world" watching.

As an investor, I want to invest in a stock prior to discovery. I want to find a stock that has incredible promise, before the general public knows about it. So as the Special Purpose Acquisition Company (SPAC) vehicle started to become a real thing in 2020, I wanted to know more. At first I was skeptical, then after reading the SEC filings of Chamath Palihapitiya's holdings in IPOA, IPOB, etc. I started to realize that this was the opportunity I had been waiting for. The rules of the game are well defined and the risks are well outlined. Yes, it is a "blank check company". And as an investor, when you get down to it, before the company you are invested in makes a profit, we are all really going on "faith".

9/10ths of the Battle

SPACs are popping up everywhere in 2021. It is easy to get sucked into a blank check company, that will never be worth more than the initial ten dollars a share. Or worse yet will merge with a company that will take the price of the shares south of that.

Everyone is drawn to winners, and we want to invest in them when we find them. One of these winners is clearly Chamath Palihapitiya. His superpower seems to be his unique ability in identifying companies that have a unique formula for success. He has convinced amazing entrepreneurs into joining forces, such as the founder of Virgin Galactic, Richard Branson.

Why Open a Bull Call Spread in IPOF

(and IPOD)?

IPOF and IPOD Book value is $10 a share and in most situations this is the floor value of the ticker until a merger is announced.

If a strong company is identified, it will often go up to $15, $20 or even $25 a share prior to the merger. If no target is identified the price will fall back towards $10 a share. This situation sets up a typical trading range suited perfectly for a Bull Call Spread (BCS).

After running several scenarios, I noticed that a great combination for a BCS was to use $7.50 for the lower strike price (buy to open), and $15 for the upper strike price (sell to open). I used October 2021 for an expiration. As I write this article the midpoint of the option value of this BCS is between $2.47 and $2.85.

For full disclosure I have limit orders set up to do exactly what I outline above for execution once the market opens on Monday for tickers IPOD and IPOF. I hope you enjoyed the article and I look forward to hearing what you think about this trading play. Happy trading!

If you want to follow along:

By a Bull Call Spread in IPOD and IPOF as follows - Set up a "vertical call spread" for the same expiration date:

(Buy to Open) 1 Contract of Calls with a $7.50 Strike Price

(Sell to Open) 1 Contract of Calls with a $15.00 Strike Price

At the time of writing this the midpoint trade was $2.47 per contract. If you set up a $2.50 limit order it should execute with slight downward price movement. if the stock runs upward it may not execute. Write one contract for every $250 you are willing to risk).

You can do the same trade in IPOD with a slightly higher limit order.

Max Gain / Max Loss (at expiration)

While we won't wait until expiration to close the trade (as I/we don't want to own shares). The P/L at/near expiration is as follows:

1. If share closes below $7.50 (extremely unlikely as their is a book value of $10 / share). Then we lose my entire premium, or $250.

2. If shares close at book value of $10 / share, we breakeven

3. If shares close above $15/share: we earn $500 per contract (200% gain)

4. If shares close between $10 - $15 share, our profit is $100 x # of contracts x (share price - $10). For example, at $12.50 / share we would have a $250 profit (100% gain).

Happy Trading - Jet Out!

Analyst's Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in IPOD, IPOF over the next 72 hours.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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