Turning up the juice

  • KCAC’s options IV surging ahead of its reverse merger with QS
  • New EV-battery tech has some high-profile backers
  • Bulls may be more interested in puts than calls

While many people are more than ready to close the books on 2020, recent action in Kensington Capital Acquisition Corporation (KCAC) suggests one of this year’s more notable market developments may be with us for the foreseeable future.

Kensington is the Special Purpose Acquisition Company (SPAC) that, after it completes its reverse merger with vehicle battery maker QuantumScape (on track for next week), will cease trading under the ticker symbol KCAC and begin what its investors hope will be a long, healthy life as QS.

In the meantime, KCAC options implied volatility (IV) has heated up, landing the ticker on yesterday’s scan for big IV increases over the past five days:

Chart 1: LiveAction scan: Big 5-day IV gain, 11/18/20. Unusual options activity. IV more than doubled.

Source: Power E*TRADE

QuantumScape has been the subject of a good deal of buzz in recent months, not just because of the “next-gen” promise backers see in its technology—a solid-state lithium battery that is supposedly safer (less flammable), more powerful, and longer-ranging than the conventional liquid lithium ion batteries used to power electric vehicles—but also because of its high-profile investors and partners, which include Bill Gates and Volkswagen.1

Whether KCAC/QS ultimately bottles some of the lightning that has helped make SPACs and electrical-vehicle stocks two of 2020’s hotter themes is still up in the air, but the stock and its options have definitely been busy lately. KCAC jumped 36% last Friday and tacked on another 9% intraday on Monday before retreating 13% on Tuesday:

Chart 2: Kensington Capital Acquisition Corp. (KCAC), 9/2/20–11/18/20. Kensington Capital Acquisition Corp. (KCAC) price chart. In play as reverse merger approaches.

Source: Power E*TRADE

Yesterday the stock kept things interesting by bouncing back more than 10% by 1 p.m. ET. So, it’s no secret why KCAC’s IV is high.

But don’t overlook the implications for trading its options. Bullish traders who see the potential for a run-up in the stock as the reverse merger completes could, for example, buy shares or call options. But experienced options traders know that high IV usually inflates options prices, which means call options may have already priced in a big move in the stock.

But that also means puts may have some extra juice in them, which is why some KCAC/QS bulls may actually be looking to sell puts. Even with the stock up more than 10% yesterday afternoon (at $19), the December $20 puts were trading around 4.10—down from 5.10 the day before—which means traders who didn’t simply want to collect $410 per contract could effectively lower the entry price on a long stock position to roughly $16.

Market Mover Update: iRhythm Technologies’ (IRTC) sharp sell-off since last Friday has rewarded traders who had already scooped up its put options. The formerly deep out-of-the-money December $200 puts, for example, had more than doubled by yesterday morning, from  $6.72 to above $16 (see “Taking cues from options positioning”).

Most homebuilder stocks, including LGI Homes (LGIH), were up big yesterday amid the latest industry data point—a higher-than-expected housing starts number (see “Taking stock of housing”).

Today’s numbers (all times ET): Existing Home Sales (10 a.m.), E-Commerce Retail Sales (10 a.m.), Leading Indicators (10 a.m.).

Today’s earnings include: BJ's Wholesale (BJ), Canadian Solar (CSIQ), Ross Stores (ROST), Intuit (INTU), NetEase (NTES), Workday (WDAY).


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1 Fortune. Bill Gates–backed EV battery startup to go public using Wall Street’s latest buzzy trick. 9/3/20.

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