Options Corner: Intuitive Machines May Offer Aggressive Traders A 'Doubleheader'

Although space exploration specialist Intuitive Machines Inc. (NASDAQ:LUNR) ranked among the top market performers last year, the new year started far less suspiciously.

What Happened: On a year-to-date basis, Intuitive Machines stock is down around 27%.

Broader economic challenges — and now the very real prospect of an ugly trade war — have hurt sentiment. Nevertheless, public securities don't trade in perfectly linear trajectories, opening the door for aggressive trading.

To be clear from the get-go, this thesis for Intuitive Machines centers around its trading potential, not its investment outlook. The latter is a different story for a different day. Fundamentally, it's not difficult to see why Intuitive Machines has struggled. Although analysts are projecting robust growth potential on a percentage basis, the revenue forecasts themselves are relatively small on a nominal basis.

More critically, investors are currently paying 3.07 times trailing-12-month (TTM) revenue. All other things being equal, should Intuitive Machines hit its revenue targets, this multiple should diminish. However, retail investors have latched onto LUNR stock. At the end of 2023, for example, the sales multiple was only 0.62 times.

As such, a sizable risk exists that already-profitable shareholders will be tempted to bail out. After all, Intuitive doesn't pay dividends so there's no tangible point beyond the belief in capital gains (i.e. speculation) to hold a losing hand.

Statistically, there have been very few instances of extreme volatility in the company’s stock, defined as one-week losses exceeding 20% (as happened last week). Still, following such extreme-fear events, Intuitive Machines tends to move lower — a trend that can be visually confirmed with a weekly candlestick chart.

Despite this obstacle, there is a possibility of an air pocket brewing that may offer aggressive traders a doubleheader opportunity.

Getting Ahead of a Dead-Cat Bounce in LUNR Stock

Fundamentally, Intuitive Machines stock faces extraordinary challenges as major players brace for the impact of President Donald Trump's recently implemented tariffs. Financially, the security lugs around a hot multiple. Statistically, investors often don't respond well to severe volatility. Seemingly, all signs point to more red ink, which could mean counterintuitively that a contrarian move is on the way.

One key factor to consider is the rising and elevated short interest. At the end of last year, Intuitive Machines' short interest reached 16.73% of its float. Since each settlement date — which occurs in roughly bimonthly intervals — the short interest has crept higher. Presently, this metric stands at just under 21%, which is rather high.

With so many traders betting against Intuitive Machines relative to its float, the bears run the upside risk known as a short squeeze. Ordinarily, an investor buys a security at a perceived trough in the hopes of selling at a higher level. In a short transaction, the opposite framework exists: bears sell shares borrowed from a broker in the hopes of buying back the loaned amount at a lower level.

If all goes well, the transaction is an ingenious one — the short trader buys back borrowed securities at a discount, returns the nominal obligation and pockets the difference in value as profit. But if the target security rises instead, the short trader would end up pocketing liabilities. Such traders have an incentive to cut losses early before further damage materializes. Of course, closing a short position involves buying to close — hence, the upside risk.

Intuitive is scheduled to post its earnings results on March 20. That could help spark an upside in LUNR, allowing the intrepid to front-run the bullish action.

Nevertheless, the upswing could be temporary. It appears that Intuitive Machines’ stock is in the final third of forming a bearish head-and-shoulders pattern. So, should traders benefit from the potential pop, the odds still arguably favor a net longer-term bearish position.

Preparing for the Double Header

With Intuitive Machines set to disclose its earnings report on March 20, the options chain expiring the day after presents an intriguing opportunity for speculators. Essentially, they would be looking for a positive surprise (or more precisely a positive market response), which entails a bullish strategy.

Depending on aggressiveness, traders have a few approaches. First, for the March 21 expiration date, they may consider a bull call spread, which involves buying a call option and simultaneously selling a call at a higher strike price. More conservative speculators may consider a short strike price of $14, such as the 13/14 bull spread, which at time of writing offers a maximum payout of over 127%. More daring traders may consider the 13/14.50 spread, which offers a nearly 159% payout.

If the implications of the head-and-shoulders pattern were to play out, LUNR stock may eventually rise to around $16 before fading off. Thus, the aforementioned short strike price could be higher, depending on individual risk tolerance.

Should LUNR reach the upside target of around $16, that's when traders should consider the second game of the doubleheader. At that point, put options should be cheaper, especially those derivatives that were previously in the money. That's when the most aggressive traders may consider a bear put spread, perhaps below the critical $10 level.

Speculators will want to wait for that moment to arise to receive ideal pricing for the puts. For now, traders should put the upswing component of the potential head-and-shoulders pattern firmly on their radar.

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