Bear Put Spread Offers Smart Rocket Lab (RKLB) Trade Amid Volatile Outlook

As a long-term investment prospect, Rocket Lab USA (RKLB) arguably offers tremendous potential. A space and defense company specializing in small satellite launch services, space systems, and satellite manufacturing, it’s one of the few pure-play public enterprises geared toward the emerging space economy. As such, it’s positioned neatly between privately held titans like SpaceX and traditional aerospace giants like Lockheed Martin (LMT).

At the same time, RKLB stock isn’t for the faint of heart. Over the past 52 weeks, the stock has appreciated by over 481%—an astonishing performance, yet understandable given its market niche. Nevertheless, as the recent fallout from its earnings disclosure has demonstrated, the volatility can be unsettling for conservative investors. In fact, given the hype, taking an innovative options-based bearish position makes the most sense.

Falling short on key financial metrics or management delivering muted guidance can quickly lead to share price deflation. Therefore, some market participants prefer short-term transactions for fast-moving names like RKLB.

For these individuals, the options market may be the ideal playground. However, when dealing with derivatives, one cannot rely on the traditional fundamental and technical analysis methodologies. These approaches attempt to portray why the market may move in a particular direction. A better alternative is to focus on probabilities.

Deciphering the Market Breadth of RKLB Stock

In the past 10 weeks, RKLB stock has printed the so-called “4-6-U” sequence: four up weeks mixed with six down weeks, with a net positive trajectory across the period. This rare sequence or market breadth has materialized only five times since Rocket Lab’s public market debut in 2021.

Notably, the following week’s price action has resulted in a downturn in all five cases, with a median loss of 2.53%. To be fair, a sample size of five data points is statistically fragile. Nevertheless, without any other data to work on, traders would be hard-pressed to justify a near-term bullish wager.

The close cousin of the 4-6-U sequence is the 4-6-D: four up weeks, six down weeks, with a net negative trajectory across the period. When this pattern flashes, the probability of upside in the following week is only 42.86%, meaning the likelihood of downside is 57.14%.

Either way, market breadth data suggests that those who are bullish on RKLB stock should wait until the sentiment cycle becomes more probabilistically favorable.

Currently, Rocket Lab suffers from a slight negative bias. On any given week, the chances that a long position in RKLB stock will be profitable are only 48.97%. The point about the 4-6 sequence — whether we’re talking about the positive or negative iteration — is that bullish probabilities following this sequence are worse than the baseline odds.

From a practical standpoint, you would be betting on a game knowing that the outcome is rigged against you. While this doesn’t necessarily mean you will lose, you would be deliberately choosing to fight an uphill battle. That’s not the most prudent choice one can make.

Taking the Statistically Sensible Route for Rocket Lab

Generally speaking, the market has an upward bias. Statistically, bullish strategies are more likely to succeed over time than bearish ones. That said, occasionally, going the pessimistic route can lead to big gains, which could be the case for RKLB stock.

As stated earlier, the response to the 4-6 sequence as a baseline formation tends to be negative. So far, the immediate reaction to the 4-6-U sequence has always been adverse. If similar trends materialize again, RKLB stock risks declining to ~$25 within the next week or two.

One idea to consider is the 26/25 bear put spread expiring May 30. This multi-leg options strategy involves buying the $26 put and simultaneously selling the $25 put. The concept here is to use the proceeds from the short put to partially offset the debit paid for the long put. In this case, the net debit paid comes out to $57.

Should RKLB rise through the short strike price at expiration, the maximum reward is $43, a payout of over 75%. What makes this trade attractive for speculators is that, on paper, the move between Friday’s closing price of $25.57 to the short strike price of $25 is only 2.23%. However, from this small move, the unique geometry of the bear put spread allows the speculator to potentially earn a payout of over 75%.

Another reason why the bear put spread is so compelling is that the short put discounts the overall trade. For instance, if you wanted to buy the May 30 $26 put outright, it would cost $161. With the spread, you can lower your cost in exchange for a capped reward. And because the expiration date is so close, the capping of the reward isn’t that big of a sacrifice.

Is RKLB a Buy, Sell, or Hold?

Turning to Wall Street, Rocket Lab has a Moderate Buy consensus rating based on nine Buys, four Holds, and zero Sell ratings. RKLB’s average stock price target is $28.55, implying ~12% upside potential over the coming twelve months.

See more RKLB analyst ratings

The Smart Way to Trade RKLB Amid Macro Headwinds

While Rocket Lab USA presents potential as a long-term investment, RKLB stock is notably volatile, which may prompt some investors to favor shorter-term trading strategies. Based on market breadth indicators, the stock could face near-term headwinds.

For those with a bearish outlook, a bear put spread offers a strategic way to capitalize on expected downside. This options strategy provides a cost-effective method to establish a short position, enabling traders to benefit from even modest stock price declines.