Someone on Wall Street thinks SpaceX could triple this week

Take this one with a big grain of space-salt. 

For weeks, the most popular contract among SpaceX options bulls has been the $330-strike call contract. The further the stock drops, the cheaper the contract’s become, the less likely it pays off, and – seemingly against conventional wisdom – the more popular it’s gotten. Right now there are more than 450,000 open positions on the call at this strike expiring Friday, at least seven times as many as the next most popular contract, according to a CNBC analysis of option-flow data from multiple providers. 

At first glance, heavy volume in a call contract with slim chances of success could easily be dismissed as the aggregate result of thousands of retail traders taking cheap shots at upside in a stock that’s arguably been the household story of the summer. After all, SpaceX traded billions of dollars in options immediately after its IPO in June, and far out-of-the-money calls have been a popular play from the start. 

But in this case – particularly after Monday’s action – it looks more likely to be a big institution that’s behind the buying: more specifically, one whose traders think the fat-chance contracts offer a good way to hedge the risk that Elon Musk’s exploration and satellite business suddenly returns to glory after a 40%-plus sell-off since its high. SpaceX reports its first earnings results since its June IPO Tuesday after the bell.

“My guess is that banks own these calls as a hedge, maybe against some kind of structured product or some other short exposure they have,” said Brent Kochuba, founder of options-flow platform SpotGamma, whose data show the buying was unlikely to have come from a hedge fund, retail traders or market-maker. “It has to be some kind of margin hedge by someone short the stock or short vol or something like that.”

The Friday $330 call was purchased about 90,000 times Monday across hundreds of transactions of different sizes throughout the day ranging from hundred-lots to thousands at the same time, totaling about $2.2 million, SpotGamma data show. At an average price of around 30 cents per contract, or $30 per trade, the total open interest in the contract is nearing $20 million.

This type of big-money buying of a strike that’s almost three times higher than current levels would be considered odd for most stocks, but SpaceX isn’t most stocks. With an implied volatility of 133, the $1.5-trillion market-cap business is more volatile than anything in the S&P 500 with the exception of Sandisk, according to ThinkOrSwim data, and it’s only getting wilder this week.

SpaceX options imply a 14% swing on earnings Tuesday afternoon. In most cases, volatility subsides after earnings, but with the lockup period for SpaceX insiders opening up two days after, tension is likely to remain high. 

While it’s possible the buyer of the calls might actually prefer they don’t go in-the-money – if they’re using them as a hedge – options contracts can become profitable at a much lower level than the strike with the right combination of volatility and price movement. 

That sweet spot might be if SpaceX hits somewhere around $215 by Wednesday morning, according to Jay Pestrichelli, chief trading officer at Tidal Financial Group, the ETF powerhouse that manages near $60 billion in assets. 

“Making some assumptions on the math, a $100 rally by Wednesday morning could be profitable,” Pestrichelli said. “It’s not a speculative moon shot – you don’t buy the highest strike in the chain unless you’re trying to reduce the cost of a hedge.”