For SpaceX IPO investors, the thrill ride has been IMAX-worthy.
On IPO day, SpaceX stock (SPCX) opened at $150 and climbed past $160. Another near-20% gain the following Monday saw Elon Musk’s spaceflight, satellite communications, and AI company achieve a high orbit of $192.50. By its third trading day, SpaceX surpassed Amazon to become the fifth-largest publicly traded company by market value.
To the moon, right?
Yet, as any savvy investor knows, things can get ugly fast: The stock quickly returned to Earth and has bounced below its market debut price more than once. SpaceX stock dropped another 4% on Monday, with a low under $140.
Read more: Create a stock investing strategy in 3 steps
This is what IPOs do
Wealth advisory Alliance Bernstein has tracked the performance of IPOs that raised $50 million or more over the past 10 years. Six months following the lockup, the median return was a 10% decline.
“While most stocks began to recover, they typically failed to revisit their initial IPO heights,” the Bernstein analysis reported. While investors are often urged to remain calm and hang on, “in the six months following traditional lock-up expirations, one in 10 IPO stocks dropped by at least 62%.”
That’s where having a plan comes in.
Plan for three possible stock scenarios
Whether SpaceX’s trajectory is high, low, or just bouncing on and off the atmosphere, investors will want a strategy in place.
If SpaceX stock soars
Every investor’s dream: The stock soars while they’re along for the ride. Still, there are strategies to consider:
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Have a plan to take some profits along the way in a tax-efficient manner.
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Ensure your SPCX doesn’t overwhelm your overall investment portfolio. Consider rebalancing holdings regularly to maintain a comfortable SpaceX exposure.
If SpaceX stock stalls
If SpaceX stock hits a price ceiling and stays there, what should the reaction be? Ask investors who bought Tesla after its run-up to a trillion-dollar market valuation in 2021, following a massive order of Model 3 sedans from Hertz. The stock topped $407 a share. Now, four-and-a-half years later — after a lot of chart action along the way — it’s still there.
If you believe in space as the “final frontier,” stick with it.
If SpaceX stock crashes
This is the real test. If SPCX takes a dive, how does one prepare? The key is to avoid panic selling and have a strategy in place. The choices include:
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Use stop-loss or trailing stop orders to maintain a profit. Most investors can’t monitor the market constantly, so having a stop-loss or trailing stop order at a predetermined target price will help protect the profits of at least a portion of the SpaceX holdings.
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Buy the dip. It takes some courage to buy more shares when a stock is in free fall, but it’s one choice to consider.
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Make sure the rest of a portfolio is well-positioned so that a SpaceX setback won’t affect an overall wealth-building plan.
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Consider selling a portion of SPCX holdings to offset taxable gains elsewhere in a portfolio.
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Prepare for volatility: Using options can provide a profit cushion during SpaceX price swings. There are several option strategies to employ to provide some measure of downside protection, including an option collar, protective puts, and spreads. Learn more with this Yahoo Finance video on options trading.
Other considerations about selling your SpaceX stock
Many insiders who hold pre-IPO SpaceX shares are subject to a lockup that prohibits them from selling their stock until after the company’s first quarterly earnings report. There are other tranches with different lockup expirations. As those deadlines roll off, the stock may see some volatility.
The SpaceX S-1 amendment includes a notice that it “may issue additional shares for a variety of corporate purposes.” Some observers are taking that as a hint of a possible merger with Tesla and other opportunities that may dilute shares. That could cause the stock price to slump, at least temporarily.
And there is one major factor to consider when thinking about selling: taxes. Will selling trigger a long- or short-term capital gain or loss?
This is the most important thing to know
Investing is difficult enough without considering the mental toll of sudden, frequent stock gyrations. Investors should know their investment risk tolerance to achieve their long-term financial goals — and perhaps reduce some of the stress.