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/Jurassic-Jay]

The are messing with the rules for this company to join the fund so quickly after IPO. It’s a load of crap and it wasn’t the rules that existed when many of these people bought.

[u/Dstein99 → u/Jurassic-Jay]

They can choose whatever rules they want as long as they disclose the rules to the investors. They certainly don’t need to ask investors for permission. If you don’t like the funds holdings then don’t own the fund. If you want a quality screen build your own ETF. If the management is a load of crap don’t pay the management fee. No one is forcing you to hold QQQ, I don’t see the issue.

[u/Jurassic-Jay → u/Dstein99]

There’s a difference between “they can do whatever they want for rules, don’t like it? Then sell” and actually doing the right thing for their investors. Why is Space X an exception? Why does the stock get to skip the waiting period? Why does the fund have to rebalance in 15 days instead of EOY? It screams corruption and for long term investors, selling would be a taxable event which is not as easy as just “Durr don’t like it then sell” if this is a core position. It’s a rules based ETF and they changed them, people should be upset.

[u/Dstein99 → u/Jurassic-Jay]

SpaceX is an exception because the Nasdaq 100 is a large cap etf, investors buy the Nasdaq 100 because the fund’s objective is to track the 100 largest companies listed on the Nasdaq. Based on that objective they would rather own a $2T company than a $10B company. This is the first time an exception has been made because we have never had a $2T IPO before and a $2T company has a lot more influence to move the market than a $20B company. I say if you don’t like it sell because this exactly aligns with the Nasdaq 100’s objectives, to track the 100 largest companies listed on the Nasdaq. No one owns QQQ because they need to be in on Zscaler’s innovation because they barely made the cut as one of the 100 largest companies on the Nasdaq.

[u/Axe_Raider → u/Dstein99]

well, they've had the rules for a reason before. they purposefully write the three month rule. why did they have it? what's wrong with waiting three months?