Rocket Lab (RKLB): Election Nerves Meet a Deflating Premium

By Juri von Randow · 20 August 2024 · Tuesday Target 34/52 2024

Why a November election, fading Treasury fairy dust and a post drop rally leave Rocket Lab (RKLB) options priced for a volatility contraction.

Herding Cats Toward November

Somewhere an economist is being asked for a global growth forecast with an American election weeks away, and I feel for them. It resembles herding cats. The political map could flip like a pancake before the ink dries, yet the official outlook stays sunny, provided you squint hard enough at it. I read the gap between the sunny chart and the itchy footnotes as the whole story of this issue.

Across the water the Bank of England has cut rates and the UK housing market has responded the way it always does, with buyers crawling out of the woodwork and asking prices marching upward. If you own a house that reads as good news. If you are still trying to get onto the ladder it reads as another door swinging shut. Central banks call this a transmission mechanism. The people locked out of it call it something shorter.

Fairy Dust Running Thin

The bigger point in the letter concerns who has actually been running the show. Everyone stares at the Fed. Meanwhile the Treasury has spent the years since 2016 sprinkling fiscal fairy dust across asset prices through the way it issues debt and the way it manages the repo market. Stocks kept climbing as if by magic, and the wizard behind the curtain barely got a mention.

That wizard is now easing off the gas. Nobody knows precisely how long the spell lasts once the sprinkling slows, which is exactly why I find the moment interesting. A market that has grown used to a tailwind tends to mistake its own balance for skill. A few bumps in the road would remind it otherwise, and bumps are where option pricing gets honest.

A Rubber Ball and Corked Champagne

The recent nine per cent drop felt like the sky coming down until it simply stopped. Corporate buybacks arrived on schedule, a few well placed investors leaned in, and the tape bounced back like a rubber ball. The rally since argues that the worst has passed. I keep the champagne corked. November is coming, the fiscal tailwind is fading, and the room for surprises remains generous.

For an options trader that sequence matters more than any headline. A sharp fall inflates implied volatility, the bounce leaves it stranded at levels the calmer tape no longer justifies, and premium slowly bleeds out of contracts while the crowd is still arguing about direction. In a name like Rocket Lab the effect is exaggerated. FOMO pours in when the stock lifts off, so the options carry a fear of missing out priced into every strike, and that pricing tends to deflate faster than the excitement does. The letter frames the trade around that collision: crowd enthusiasm on the way in, volatility contraction on the way out.

Squinting Through the Sunshine

What I am watching from here has little to do with rocket launches. The November election sits at the centre, because a pancake flip in Washington reprices everything from fiscal expectations to the shape of the volatility curve. Around it I watch the pace at which the Treasury keeps easing off, whether the buyback wave that caught the market has more behind it, and how long the post drop rally can hold before the surprises the letter expects start to show up.

Volatility contraction is a process with a clock on it. Every calm session takes a little more air out of the balloon, and every scare puts some back in. Nobody becomes rich overnight with options, and the letter's own headline says as much. The question worth asking of any rocket stock trade in this window is how far the premium can compress before the next shock arrives, and whether the crowd notices before the price does.

• RKLB

US election · volatility contraction · options premium