I've explained it once, but badly - if I don't collect my thoughts well in advance it's hard to explain the reasoning behind certain plays. This post is the start of **my redemption ark (in terms of me being capable of explaining my thoughts)**, and so I will try to explain once more but more carefully why I decided to buy "LUNR tickets" when it was trading at $8\~
I've since then got an 800% gain on my options:
[My position \(not including the new one I just made\)](https://preview.redd.it/a8h9skpl3t8g1.png?width=698&format=png&auto=webp&s=53289b9bed2aea9c59df7740495e6d49013bf256)
# It started with a message from a WSB discord user
I'll forever love this dude, he told me about LUNR and an LTV contract, briefly explained why LUNR is going to win the contract and that he has invested into them.
My initial thoughts were the typical "yea right, buddy" thoughts:
* How do I know you're a mechanical/space/whatever engineer that actually understands what is required by NASA?
* How can you be so sure, that they are the ones to get picked?
* Have you even checked their financials?
[My brain when I realized what I realized](https://i.redd.it/0qam0x073t8g1.gif)
But then my ADHD-crippled-monkey inside my brain took over:
* Wait, did you say only three companies selected?
* Final stage of the contest?
* Previous collaborations with NASA?
* Wait, you told me that there's a probability two companies might make the cut?
* $4.7Bln contract?
This is a typical 'gambling' game, and every gambling game can be analyzed, simulated and if you do it well enough you can get an edge. You see I used to play poker, and when you want to analyze a hand you do similar techniques that banks use to predict stock market prices.
# Simple Gambling Math
Note: To simplify the text and make it shorter, I'll denote probability as P(event).
Imagine that you're playing a simple "roll the 3-sided dice" game. Each side has a probability of being rolled equal to 1/3. Now say you're betting $1 on your favorite number and if you win, you get $1.5 back. You could calculate the EV (expected value) of this game by simply calculating:
P(win) \* amount(won) + P(loss) \* - amount(loss) = your EV (of discrete probability)
so in our sample game we have:
1/3 \* $1.5 - 2/3 \* $1 \~= $-0,17
Roughly translated to human language -> In the long run, for every time you decided to play this game you effectively lost $0.17
If we can figure out how this "LTV contract game" is played and what are the individual probabilities then we can figure out if it makes sense to play this game or not.
# Monte Carlo Simulations
Now here's what I was thinking, there's a lot of information out there, publicly available. That allows me to guess what might get factored into this decision. So all I need to do is to "define a game" and the rules to play this game, run simulations of this game and then approximate the likely probability. Why do I need to do this? To be as independent as possible (and factor in different odds of a decision being made this way).
**So this is the game:**
You have 3 companies at the beginning and in the end (1 or with a certain probability 2 will be picked), you have a set of rules where each rule defines which company scores points with what probability (random events).
At the start of the game you chose a number equal to the number of rules you'll randomly select from the original set.
At the start of each simulation you will modify the base probability of a rule (/event) occurring (and you do so randomly).
Run a lot of simulations -> assess conditional probabilities based on results, i.e.:
**- P(LUNR win | IF 1 selected)**
**- P(LUNR win | IF 2 selected)**
Now of course it gets even better if you start factoring the odds of the market recovering, space age boom, etc. everything slightly improving your odds.
# Results
Even if the chances that 1 company would've been selected, the odds were stacked in your favor as long as you were buying deep OTM calls with long expiry (at the time I bought end of JAN 12.5C for roughly \~ 45c premium each). The reason for this is that the leverage increases your volatility, but as a result of that you can potentially lose everything you invested into it, standard shares would just fall to a certain price.
However when factoring the possibility of 2 companies being selected the eventual probability of LUNR winning became slightly greater than 1/2... meaning that it just didn't make sense "not to play" - even if you think they might lose.
As of right now, if it wasn't made clear that 2 companies would get selected... then buying the deep OTM calls wouldn't pay off (or barely for that matter), mostly because the premiums are already high. However - NASA made clear that they have an intention of awarding two companies, to diversify vendors and prevent vendor lock in, making the calls still lucrative.
Huge insider buying a month or so back also indicated larger odds of winning, further helping the "narrative" that this is a valuable play.
**Trying to estimate a PT**
The problem with companies such as LUNR is that it's increasingly hard to estimate a PT. One of the possible ways of trying to guess the potential price is to take the contracts that they signed and just add them to the market cap -> recalculating the price (it's not perfect, it's pretty inaccurate, but it gives you some kind of an estimate). If I just assume that the current price already factors in some of the 4.7B contract then with a mkt cap of around 4.7B you get $40 a share.
I tend to use this number as "the super-positive estimate", I then take roughly 1/3 of it and declare it as the "the super-pessimistic estimate" .. i.e. $40 / 3 \~= $13.4
Pessimistic estimate set as $40/2 = $20
The middle ground is what I use as the "average, regular estimate" i.e. $30
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So, rough estimates:
**Super-positive estimate: $40+**
**Average estimate: $30**
**Pessimistic estimate: \~$20**
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**Super-pessimistic estimate: $13.4**
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This kinda makes it clear why I decided to go with $12.5C.
Current price - USD 16\~