Pope Leo XIV may be right in the long-term that artificial intelligence endangers humanity, but investors are ignoring him in the short-term as they try cashing in on Wall Street's hottest theme.
The world's top AI companies are now emerging from their private-market chrysalises to sell shares via initial public offerings. Pre-IPO allocations have been devoured by wealthy investors, and post-IPO trading is expected to be truly avaricious.
Elon Musk's SpaceX IPO is scheduled for Friday. The company plans to raise close to $75 billion, giving it a market value of some $1.8 trillion when trading starts. Institutional and retail trading demand is high. Exchanges and index providers, the profiteers of trading volume, will cash in by quickly listing the stocks.
SpaceX, and eventually Anthropic and OpenAI, will be headed for the benchmark indexes and exchange-traded funds, including the Nasdaq Composite and the Nasdaq-100. Owning those portfolios are a way to benefit from hot IPOs without chasing the stocks.
The big IPOs are large enough to join the S&P 500 index, but that index provider's rules bar fast listings. The decision will likely lead to benchmark index performance divergences.
Options, meanwhile, are expected to be tradable by June 16, an event that should whip stock trading into a frenzy of gambling. IPOs by definition are stock events, but options trading will likely become the main event. Zero-dated options gamblers, and every investor who failed to get as much as stock as they wanted during pre-IPO allocations, will likely rush to the options market, creating historic options trading volumes that in turn could cause explosive stock trading.
Investor demand and limited stock supply means options implied volatility will likely be higher than merited. This creates a margin of safety for dealers when little data exists to perfect pricing. Spreads should be wider than normal to add another level of dealer protection as the market mob is anticipated to make decisions that are unmoored from rational analysis.
Three strategies merit consideration.
Selling cash-secured puts that expire in a month or less gets investors paid by the options market to buy stock at lower prices. Match strikes with desired stock purchase prices. If the stock never touches the strike, you keep the put premium.
Another way to benefit from the options frenzy is buying stock and selling calls with strikes 10% higher than the stock with expiries of a month or less. Pick strikes 20% higher for one- to two-months expiries. The "covered call" strategy lowers the stock purchase price by the received call premium and obligates investors to sell stock higher.
To harness a big amount of stock without much money, buy one call and sell another with a higher strike price but same expiration to profit from potential rallies. Options are stock proxies and they let investors control more stock for less money than buying stock.
In moments when opportunity is cloaked in nuance, we have long relied upon John Marshall, Goldman Sachs' derivatives strategist. His knowledge of the best strategies for various markets is encyclopedic, and it is backed by rigorous benchmark analysis. More than any other strategist, Marshall has formalized and advanced Wall Street's understanding of how options let investors better navigate the stock market by managing risk and maximizing return. Until now, only major Goldman clients worked with him.
