Intuitive Machines, the Satellite Company, Rockets 50%+, Spurring Unusual Options Activity

Intuitive Machines (LUNR) received a massive NASA contract worth billions yesterday. As a result, LUNR stock is up over 50% today. That has spurred huge, unusual options activity in near-term calls and puts today.

LUNR stock is at $8.14 per share in midday trading, up over 51% from yesterday's close. That gives the stock a market capitalization of over $521 million today.

This was after the company announced on Sept. 17 that it had received a massive new contract from NASA to put satellites in orbit around the moon over the next five years. The company said it could have a maximum potential value of $4.82 billion throughout the contract, including a five-year extension.

As a result, options activity in LUNR stock has skyrocketed as well. The thinking may be that the market could revalue the stock even higher and speculators are gambling on the short-term moves in the stock.

Unusual Options Activity in LUNR Stock

This can be seen in Barchart's Unusual Stock Options Activity Report today. The table below shows that 5 major tranches of calls and put options in various strike prices and calendar expiration periods have had unusual activity.

For example, the largest traded tranche has been the $8.50 call options that expire in 2 days on Sept. 20. These calls are roughly at-the-money and have a 70 cents midprice. There are over 14,500 contracts traded at this strike price, over 127 times the prior outstanding contracts before the NASA announcements.

In effect, speculators believe that LUNR stock will rise to over $9.20 (i.e., $8.50 +$0.70) by the close of trading on Friday, Sept. 20. Moreover, some call buyers may be looking to flip the calls. They could be betting that the price of the calls will rise over 70 cents sometime in the next two days. For example, even if the stock rises to $9.20 before Friday, the price of the calls might reach $1.00 (i.e., 30 cents of extrinsic value over the 70 cents of intrinsic value at $9.20).

Other traders are betting that put options may have some value. For example, the Sept. 27 expiration put options with a strike price of $7.00, well below today's spot price, have traded with over 3,500 put contracts. That is over 23 times the prior number of put options contracts outstanding prior to the announcement.

Put Options Are Attractive - Especially to Short Sellers

Speculators buying these puts may be gambling that the stock will recede in the next 9 days. Since the midprice is 40 cents, they are betting that LUNR stock will fall to at least $6.60 by Sept. 27, a drop of over 22% from today's rough price. 

On the other hand, short-sellers of these out-of-the-money (OTM) puts are making a yield of 30 cents divided by the $7.00 strike price, or 4.28% over the next 9 days. That is a very high yield and may reflect a desire by these short-sellers to find a cheaper buy-in target price. Meanwhile, they are getting paid quite well while waiting.

Intuitive Machines - a Gamble Here?

So far the company has not indicated how profitable this NASA contract will be for the company. But given that its market cap is only 10% of the full value of the NASA contract, there may be room to speculate here.

For example, let's assume that Intuitive Machines has built in an average 33.3% profit margin in the NASA contract over the next five years. That implies that the average gross profit could be $1.59 billion, or $318 million per year for five years. After taking out 50% for overhead and 20% for taxes, net income could average $127 million.

That implies that the stock is on an average multiple of just 4 times earnings (i.e., $521/$127 million). That implies there could be good upside in the stock. For example, at 8 times earnings the stock could be worth $1 billion or just less than twice today's stock price.

On the other hand, there could be a great deal of volatility in this contract. The above calculation assumes a maximum payout. There could be losses and teething issues. Moreover, the contract is fixed-price, so there is no room for error.

Price Targets Are Higher

Nevertheless, there seems to be some upside left in LUNR stock's valuation. For example, the average price target of 5 analysts reviewed by Yahoo! Finance is $9.80 per share. That is 15% over today's elevated price. 

Moreover, over the next few days, analysts may revise their projections higher. This could be why speculators are piling into near-term call and put options in LUNR stock today.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.