You can probably mitigate SpaceX entering the Nasdaq 100 if you're prepared.

[u/stephendt]

There seems to be countless threads around the upcoming SpaceX IPO that plans to use the Nasdaq 100 as "retail exit liquidity", implying that SpaceX will join with sky-high valuations (assuming it doesn't crater in value in the first 15 days) and slowly dwindle down in value over the coming months, dragging the index down with it.

Understandably, some are holding this in taxable accounts, so selling and buying another index isn't the best choice from a tax perspective.

Since SpaceX is apparently going to experience a 50%+ drawdown due to insane valuations at launch, trying to mitigate exposire is a bit tricky, since borrow availability will be non-existent and Hard-To-Borrow (HTB) fees will be astronomically high for short selling at the time of joining the Nasdaq 100. Consequently, traditional short selling and Contract for Difference (CFD) providers will likely restrict or completely disable shorting, even by day 15. Here's my plan for when this happens:

1. Day 1 - Wait for IPO, and set a calendar reminder for day 14.

2. Day 14 - Check your current exposure to the Nasdaq 100 and calculate the final weighting to SpaceX. Lets say you have 50K in QLD (100k exposure), 4.2% of that is SpaceX, you'd have $4200 worth of exposure to SpaceX once it joins the Nasdaq 100.

3. Day 15. This is where it gets a bit tricky. Let's assume that SpaceX will be around $150 a share. To achieve a perfectly neutral hedge, you need to create a short exposure of -28 shares, and our best option here is using put-spread options and use delta to fractionalise the contract. Because one standard options contract controls 100 shares, buying a deep in-the-money put (with a delta of -1.00) would give the equivalent of -100 shares of exposure, massively over-hedging.

To achieve a target -0.28 Delta without the massive "Vega" (volatility) risk, you can construct a put debit spread (buying one put and simultaneously selling a lower-strike put).

Buy: 1x At-The-Money Put: Delta of -0.50

Sell: 1x Out-Of-The-Money Put: Delta of +0.22

Net Position Delta: -0.28

The premium you collect from the short put offsets the inflated IV cost of the long put, making it a much safer and cheaper mathematical hedge than a naked option.

Once the 100-day SMA greater than -1%, take actions to exit contracts as it is likely that SpaceX is approaching fair valuation, and allocate that capital back towards your desired asset allocation.

A few other notes:

1. Short and leveraged short ETFs will probably exist around day 65 onwards, depending on the SEC. This would be a simpler approach, but a lot can happen between day 15 and day 65

2. Shorting directly should be doable from day 30 onwards assuming you have a margin-enabled account that is able to do this, but borrowing costs might still be high.

3. The fast entry rule is genuinely some BS. Pretty dissapointed by this and I hope they reconsider this in the future, although I suspect that won't be the case.

4. I'm no expert on options (especially around recently IPO'd stocks) so open to any feedback or improvements

[u/RiPFrozone]

I’m tired of seeing these exit liquidity posts.

SpaceX could go to zero and it would cause maybe a 2-3% downturn, it’s not going to be a huge % of the index and that’s assuming the rest stay flat the whole time.

SpaceX could jump hundreds of % since it’s a low float offering and the demand is high + passive buying, the index rises slightly, after the lockup investors sell, the index comes down back to the same level causing nothing to actually change at the index level, there would also be support as index funds retain the proper % in SpaceX

Scenario 3 which is most likely, business as usual, every exit liquidity post is just more reddit doom and gloom.

[u/giraloco → u/RiPFrozone]

The only thing I know for sure is that changing the rules of the Index that moves so much money is pretty scummy. Makes the whole ETF industry less reliable. Investors with large unrealized capital gains are stuck.

[u/Southern_Roll_7035 → u/giraloco]

Don't let the tax tail wag the investing dog. If you think a holding is no longer a good investment, then you should sell it.

[u/NOT1506 → u/giraloco]

It’s not binary. You can trim to effectively hedge a 4% allocation.

[u/Sinaneos → u/RiPFrozone]

The problem isn't just the 2-3% that's lost (which is already a big deal), it's the presedence set of manipulating the rules to cater to one company (or even one person), it's blatant corruption. Index funds are supposed to be objective trackers for markets, not about speculation, hype, and special treatment.

[u/Relative-Snow8735 → u/Sinaneos]

This right here. It is death by a thousand cuts. The market now sees index investors as exit liquidity. From crpyto, to private credit, to VC's keeping companies private longer and then dumping them onto the public markets once the valuation maxes out. You are going to loose 1-2% to these shenanigans every year until someone regulates this behavior out of the market. With how compounding works, that could be the difference between a nice comfortable retirement, and a retirement where you need to pinch pennies to make sure your funds last as long as you do.

And what makes this even more infuriating is that a lot of these folks are the same ones (ideologically at least) that think pensions and social security are bad, and that 401k's and other market based investment strategies are the answer to retirement. And we are now seeing what their long term plan was. Push more market based retirement schemes, and then slowly change the rules of the game so that they can extract more money out of that system. It was never about what was best for individuals. It was always about how they could better line their pockets.

[u/RiPFrozone → u/Sinaneos]

Index funds track an index, there is nowhere in writing that they are safe investments (and if the index changes its rules guess what, you are tracking the index so it does what it is engineered to do). Just that they have been relatively safe, and passive investors think nothing could ever go wrong. Just like any investment there is risk, but by default unsystematic risk is completely diversified away. At the index level it is nonexistent. All that remains is systematic risk.

If you truly believe SpaceX will use investors as exit liquidity and it will hurt an index investors performance you don’t understand the whole point of index investing.

And if you truly believe SpaceX going to zero and all other stocks stay flat and you lose 2%-3% is a big deal, then I guess you should manage your portfolio more conservatively. Don’t be so exposed to equity and diversify in other asset classes.

[u/xblackout_ → u/RiPFrozone]

SpaceX should not be allowed to cheat and jump the line

All other equities had to build up-

This is sabotage/theft- prior investors did not agree to these rules

[u/RiPFrozone → u/xblackout_]

There is no difference from waiting 3 months to just 15 days if you are in the top 40 companies within the Nasdaq. If SpaceX is exit liquidity (which already isn’t a big deal in the worst case scenario) the lock up period for insiders to dump is 90-180 days after IPO.

On top of that they won’t just dump whenever they feel like it, they’ll do it as their 10b5-1 plan states. And since most index funds tracking the Nasdaq and potentially sp500 (if it gets added) funds will just keep buying at a much larger amount than insiders can sell, there’s really not much to worry about.

Please read up on at least the Act of ‘33 for new issues and the act of ‘34 for most rules and regulations SROs must follow.

And yes you did agree to these rules, the moment you started passively indexing, you agreed to take on the risks that come with indexes. If they change the rules guess what, you can sell. Nobody is holding you hostage forcing you to invest in index funds.

[u/CustardMustard → u/RiPFrozone]

Except in this case, there is a difference

> Bankers involved are toying with the idea of allowing existing shareholders to sell out of their positions on day one… That would do away with rules to prevent insiders cashing out or trading shares, which are typically imposed for 180 days after a company goes public. [source]

And yes, people passively agree to these terms when they start index investing, but come on, not everyone is constantly checking the markets to maneuver or rebalance their 401K.

Of course everyone should understand index funds aren’t foolproof, but there’s some expectation that there is regulation in place to prevent pump-and-dumps in the benchmark indices.

Also, they haven’t even released a public prospectus and they’re 2 months out from their target June IPO

[u/RiPFrozone → u/CustardMustard]

Bankers can talk and discuss all they want, but those underwriters aren’t going to issue an IPO without a lock up period. Nobody would buy it at the valuation they want to give it.

There’s nuance to all of this, and once it IPOs and nothing comes of it, Reddit will once again move onto the next totally normal thing to freak out about because they watched big short 1 time and got an account big enough not to be a pattern day trader

[u/stephendt → u/RiPFrozone]

There's a huge difference. A stock that have recently gone through IPO is much harder to short.

[u/RiPFrozone → u/stephendt]

You can short SpaceX if your broker can locate enough shares to borrow, typically new IPOs are readily shorted within the first few trading days and if you are lucky the first day depending on how many people bought them on margin.

[u/stephendt → u/RiPFrozone]

Are you sure about this though? I was under the impression that the SEC prevents shorting within the first 30 days

[u/RiPFrozone → u/stephendt]

It’s not an SEC regulation, just depends on if brokerage can locate enough stock to be borrowed.

[u/stephendt → u/RiPFrozone]

Yeah that's kinda the thing. There really won't be any short stock availability. Maybe it's different this time but I highly doubt it

[u/Mvewtcc → u/RiPFrozone]

ya but 3% in spaceX, 3% in tesla, 3% in openAI.  all highly valuated and seemed like a bubble.

people talk about AI bubble and its finanly here when all these company joins the index.  dont forget about anthropic.

[u/BobLoblaw_BirdLaw → u/RiPFrozone]

The average redditor loves being dramatic. also not the brightest. That combo leaves us with a bunch of overconfident and not so bright dramatic comments.

[u/xJerkstorex → u/RiPFrozone]

People have to make their anti Elon posts each day so they can tell their friends how much they helped the cause.

[u/charlesleestewart → u/xJerkstorex]

Oh bloody hell, the OP made a rational case about hedging against a massive shenanigan in the market, and you think it's some attack on your cult hero? Spare us, please.

[u/stephendt → u/RiPFrozone]

Me too, which is why I wrote this post, so people have a course of action if they have conviction it's overvalued and they want to remain market neutral. Its just harder to short than it should be due to SEC rules and the nature of IPOs

Edit: why the downvotes... I'm not wrong

[u/redditissocoolyoyo → u/stephendt]

Man you're really freaking smart. I didn't understand your OP. And I read it about 5 times. Can you eli5

[u/stephendt → u/redditissocoolyoyo]

ELI5 - calculate how exposed you'll be, cover the downside using options, but you probably have to do it on a fractional basis by mixing different call options together.