I would like to share my metric with you and provide DD based off of it on SPCE and why I think the next leg-up for the stock is towards $30. This may be a lengthy post and is a portion of what was provided to my group, but I think it is an interesting system and would like to share it with you!
The metric that I developed and use is called VoEx, and it measures various underlying price-directing forces on a stock. VoEx can provide insight into what direction the "undercurrents" of a stock are pointed towards. In graphical form, this comes by way of combing the stock price and VoEx in such a way that the VoEx values can tell us if a stock is overly inhibited or being propelled towards a certain price.
In the VoEx graphs, VoEx-daily is magenta, VoEx-trend is tan, and the price of the stock is blue. Additionally, there are two horizontal lines: the top line is the "inhibition line", and the bottom line is the "propagation line". When VoEx-daily or VoEx-trend are above the inhibition line it typically represents a price-inhibitory sentiment: the stock price's current trend (typically upwards), is being pushed against. When VoEx-daily (magenta) or VoEx-trend (tan) are below the propagation line, it represents instabilty by way of positive-feedback loop mechanisms. That's to say: the current trend is typically pushed forward.
Below, I hope to demonstrate the system to you as well as provide my rationale for $SPCE towards $30.
June 11th, 2021
June 11th was $SPCE’s successful flight and landing. Prior to this historic day, $SPCE had been experiencing a significant “buy the rumor” style price increase.
Despite the historical significance surrounding this event, there were certain components of the report worth noticing: (Note: The reports are produced by Deep Dive Stock and include several additional metrics).
all in all, there were good indications that the market may not be adjusting to the new increase in price. Yet despite this, the price continued to rise steadily!
June 24th, 2021:
On June 24th, $SPCE continued to rise, and VoEx along with it:
But the same trends continued:
It is worth highlighting how deep into new territory $SPCE was – how would a company’s stock perform after such a monumental achievement? Many companies had revolutionized a sector or a product, but (at least personally) I felt $SPCE had performed something that was truly profound: entered man into the space age.
Traditionally, an elevated VoEx is associated with a price depreciation and reversion to its last-known healthy state (here, around 2020-07). As mentioned in the Tier II educational material, however, elevated VoEx’s can indicate run-away price appreciation under certain circumstances. (Note: The educational material is provided by DDS and gives both practical guides to using DDS' systems as well as (hopefully) a good resource for the market as a whole).
Here, some of those criteria were forming:
It appears that the next trading day fell into these circumstances.
June 25th, 2021:
The 25th saw a substantial increase in price over 50%. This caused $SPCE to experience a vanna squeeze. Never heard of a vanna squeeze? Not many people have – but let’s take a look at the hedging matrix:
(Note: The hedging matrix shows the amount of shares that have to be purchased and sold per point move in IV and price)
Although the numbers themselves don’t seem very large, it indicates the rip currents underneath the stock – the price action was being driven by volatility, not price changes! Yet another reason that directionlizing the options is necessary. This tells us that by watching volatility we can get a price-action prediction.
Is should be noted that there were still rumors of a continued price appreciation, and a developing short squeeze.
Yet, VoEx provided evidence against this argument.
Who sees what happened?
On a large spike in price, VoEx dipped.
This was quite uncharacteristic of SPCE as of late: most large increases in price were met with spikes in VoEx, followed by the characteristic reversion in price. For instance, check out the two most recent spikes in price as of the 9th of June, just a few days before the space flight:
Yet, even with the space flight looming, the stock price could not escape the price-directing undercurrents. Except for now.
After divergence, the price fell as follows:
So VoEx won again, and divergence showed us exactly when that was going to happen. A devastating change in price if one were hoping for a upwards gamma squeeze or short squeeze – as many on Reddit were.
There was one more grasp for higher prices on the 8th of July:
But with the concurrent spike in VoEx, I wouldn’t’ve been convinced that the price was going to linger there. And indeed, let’s take a look over the next few days:
July 9th, 2021:
July 12th, 2021:
July 13th, 2021:
July 14th, 2021:
July 16th, 2021:
I think the most important aspect to notice here is how fast VoEx-trend went from above the inhibition line to below the propagation zone – in over a span of only 5 days! To put that into perspective, recently VoEx-trend for SPY has fallen into the propagation zone from the inhibition zone; a process that took over 1 month!
Let’s fast forward a few days and start digging into some more metrics!
August 5th, 2021
Since the drop, $SPCE was hanging out by $30, and VoEx was stalled at the propagation line:
The reasoning wasn’t far to be searched for:
The large section of puts at $30 (above) was a good motivator for the price to stay above $30. Due to the directionality and the current volatility on the stock, the resistance towards any more downwards movement was also provided by the delta hedging itself (below):
he hedging matrix showed a much more significant resistance towards price depreciation than towards price increases.
So VoEx had stalled, the hedging matrix showed less resistance towards upwards mobility, and the (old version) of the SNAP graph for the 5-day interval showed positive returns: (Note: The SNAP graphs show the predicted %-return over a given interval, here it is the 5-day interval).
So perhaps it was unsurprising that the stock experienced a quick shoot up in price.
August 9th, 2021
Rising from $31.53 on August 5th, to $35.21 on August 9th (+11.67%), provoked several changes in the underlying environment of $SPCE:
1 - VoEx experienced a classic inhibitory spike:
2- The hedging matrix got beefed up substantially against upside movement:
Both of which were indications of continued downside.
[ Nerd note:
What’s particularly interesting about this hedging matrix is that the option counts did not change terribly much. To see this, let’s have a look at how to calculate directionality of options in a quick and dirty way:
On the 5th we have:
On the 9th, only four days later:
So, the total change in options compared to the total change in delta supersedes 1 – this implies not only did option volume change, option directionality changed on currently held options.
So, if we assume that all the calls that disappeared were dealer long (since the price rose, retail would have sold their short calls), and the puts were dealer short, this gives a maximum delta accountable of:
So, +62,286 delta was added even after accounting for the change in options which only accounted for 33% (33,788) of the option matrix changing! This was either a switch of dealer short calls to dealer long, or dealer long puts to dealer short puts.
So keeping tabs on just the options counts doesn’t seem to be enough!
How does this help us? Well let’s look at the meaning of those two swaps:
And indeed, instigated by the spike in VoEx and encouraged by the options field, over the next two days, $SPCE demonstrated considerable downside:
August 10th, 2021:
August 11th, 2021:
Something to take note here, again, is that there is an association (although I haven’t dug into the numbers) between the velocity of VoEx and the corresponding future price-action. For instance, notice the significant decrease in VoEx with the price depreciation on the 10th; it almost appears as though the price and VoEx have returned to “where they are supposed to have gone if it weren’t for the spike in price”. Something to ponder.
Before we skip ahead a few weeks, this is a good time to look at how the options layout can change through time as well and what that can indicate for us:
Here is the options layout for August 11th:
For those of you who have read the Tier II material, what kind of layout does this remind you of? (Hint: its backwards!)
It’s the normal distribution pattern! Except: the normal distribution is on the puts side, and the right-skew is a left skew and is on the calls side!
From the Tier II material:
But where the normal distribution pattern is typically a bullish indicator, the backwards-normal distribution pattern (there has to be a better name), is bearish.
Let’s keep this in mind as we fast forward some.
September 3rd, 2021:
Since leaving $SPCE on August 11th, 2021, it had a backwards-normal distribution pattern, a plummeting VoEx and a price of $27.36. On September 3rd, it has a price of $24.26 and the following VoEx:
The only real indicator here is that VoEx-trend has reversed course! Typically, a healthy sign in a stock and can mean the return of a bullish sentiment. But, before we get too happy, checking out the other components of the report gives mixed signals, namely the option layout:
Things are getting “choppy”, especially on the call side – the nice smooth ascent from $0 to the $50 strike is gone, not punctured with different volumes at different strikes. Could you still argue that it’s a reverse-normal distribution? Sure. But it just doesn’t look a nice as it used to.
(It should be noted that on the 2021-09-02 I did a Reddit DD explaining why I thought the next leg for SPCE was a bullish move to $30; I still echo that sentiment, as we will see).
September 10th, 2021:
By now, $SPCE has been at or around $25 for little over a month, VoEx is stalled near the propagation line, and the option layout is messy. Let’s focus on the options layout quickly: do you see the developing options layout pattern?
If you do, nice! You’ve been looking at a lot of options layouts! If you don’t, no worries – it is definitely a “smear pattern” for sure, but I think there might be a developing pattern brewing beneath the surface.
Namely, I think it is a developing bull horn, but what is interesting is that it is an undecided bullhorn (At this point I’m sure you think I’m making this up, but trust me, you can see option dealers and market makers adjust in real time! This will be covered in Tier III ad nauseum).
It is kind of hard to see here so I’ll put it in a table, and then you have a look yourself:
So, we have a strike price at $25 that is almost equal in volume, we have more calls than puts at $30 (almost double), and more puts than calls at $20 (almost double)! An undecided bullhorn!
Are market makers going to anticipate that $SPCE moves back down to its last-known stable price (i.e.: When VoEx was reliably in the stability zone back in late-2020) at $25 - $20 (seriously go check it out, around July of 2020 until ~Dec of 2020 $SPCE hovered between $25 and $20). If this happens, you would expect the calls to increase at $25 and the puts to decrease.
Or is it going to adjust to a higher price-point of $25-$30? If so, you would expect the calls at $25 to decrease, and potentially the put volume there to increase. This would create a call wall at $30, and a put wall at $25.
Perhaps this explains why VoEx has been so angsty lately, and the option patterns have been in “free fall”.
[Tin foil hat time: I have a hunch that when the market makers themselves are not sure of where a stock is going to go, they “open the flood gates” for transactions on a stock seeing where the market thinks the stock will go. Once they have an idea (probably through some algorithm), they slowly turn off the faucet to navigate towards the anticipated price or price range].
So, let’s see what today’s (September 24th, 2021) action brought!
The Finale: September 24th, 2021:
Less angsty VoEx? Check:
VoEx-trend is still continuing its upwards mobility, but price has stagnated some. I think it would still be reasonable to say VoEx-trend is continuing upwards.
Have the option dealers decided where their best bets are? I think so. So, dear reader, is it:
Remember the characteristics of the bull-horn pattern:
We'll get to #3 in a minute, but!
My answer: B!
Let's look at the numbers:
Producing the following changes:
So, to meet the criteria for a bullhorn, the calls have to be larger than the puts at a higher strike, and the puts larger than the calls at a lower strike.
With the concurrent -4,000 some calls at $30, and the +4,000 some puts at $25 the bullhorn pattern took one step closer to realization.
Let’s address #3 for a moment: the other caveat to the bullhorn pattern, and part of the reason it can be such a powerful predictor is that it is usually the dominant options-driven force on a stock – but is that the case with $SPCE? And if not, is it moving in that direction? Let’s find out!
The assumption here will be that if the bullhorn pattern is taking dominance over the options field, then the other options throughout should slowly start to diminish, usually through expiration. So, let’s look at the total number of calls and puts (doesn’t matter if they’re directionalized or not) from the 10th to the 24th:
Which were the strikes with the greatest differences?
It seems $24 saw a great reduction in puts, and $25 saw a modest increase. $30 saw a decent decrease in calls and a slight decrease in puts. But overall, there was a relatively large reduction in options over the past trading week.
Does this mash up with our theory of a developing bullhorn for $30 and $25? That’ll be for you to decide!
So VoEx is continuing upwards at the current price-point at the propagation line (a pattern, if you remember, that is typically associated with a stalled price-action), there is a possible forming bullhorn pattern at $30-$25 with significant number of options leaving recently.
So, my humble opinion? $25-$30 is the next range, with bullish leanings towards $30.
I hope you've enjoyed this overview of SPCE and VoEx,