Palantir rallied this week and has been on a great bullish run in the last two months.
With earnings next week, option premiums on PLTR stock are elevated, which is good news for put sellers.
A cash-secured put is a slightly less bullish trade than buying the stock. It is considered a neutral to slightly bullish trade.
A cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium, or be assigned and acquire the stock below the current price.
Selling put options is an easy place for investors to start with options. They are like a covered call and are pretty easy to understand once you know the basics.
Traders selling puts should understand that they may be assigned (forced to buy) 100 shares at the strike price.
Let's look at an example using PLTR stock.
With the stock trading around 20, investors could sell an Aug. 18 put with a strike price of 18 for around $0.90 late Tuesday.
Put Trade Could Mean Buying 14.5% Lower
Investor selling this put would receive $90 into their account, which would be theirs to keep. If PLTR stock falls below 18 by Aug. 18, they would be required to buy 100 shares at 18. The effective net cost of the position would be 17.10, thanks to the option premium received.
That is 14.46% below Tuesday's closing price.
If the stock stays above 18 at expiry, the put expires worthless, leaving the trader with a 5.26% return on capital at risk. That works out to 113% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls quickly, the trade will suffer a loss. However, the premium received will help to offset the loss.
The maximum loss on the trade would occur if PLTR fell to $0, which would see the trade lose $1,710 but most traders would cut losses long before then.
A Good Way To Generate Return On PLTR Stock
Cash-secured puts are a great way to generate a return on strong stocks, potentially without ever having to take ownership.
If the put does get assigned, the investor takes ownership with a reduced cost base. Traders can potentially begin selling covered calls to generate additional income from the position.
Traders can set a stop loss if PLTR stock drops 8% from the time of trade entry.
According to the IBD Stock Checkup, PLTR stock is ranked No. 1 in its group and has a Composite Rating of 99, an EPS Rating of 81 and a Relative Strength Rating of 99.
Please remember that options are risky, and investors can lose 100% of their investment.
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This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
