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Palantir Technologies (PLTR) stock has been climbing lately, but today it's off its peak price. Analysts have also been raising their price targets, but PLTR stock is still over those targets. One way investors can play this is to sell short out-of-the-money puts.
PLTR is at $36.44 in midday trading on Tuesday, Sept. 24. That is off its peak of $37.95 the day before. Has the stock peaked?
I discussed this in my previous Sept. 2 Barchart article, “Palantir Stock Has Risen Over Analysts' Price Targets - What Now?” At the time, PLTR was at $31.48, so it has risen 15.8% since then.
Moreover, analysts' price targets have been rising. For example, Yahoo! Finance reports that the average of 16 analysts is $26.94 today, up from $25.69 mentioned in the Sept. 2 article. However, AnaChart's survey now shows an average price target of $36.05, up from $30.27 three weeks ago from the same 15 analysts.
How Trade Recommendations Fared
I discussed selling covered calls at $34.00 for expiry on Oct. 4, as well as shorting out-of-the-money (OTM) puts at $29.00. The calls are now “in-the-money” and are likely to be exercised (i.e., the seller of those calls will have their options exercised).
The covered call premium received was $0.75 on Sept. 2. So, it's equivalent to selling PLTR shares at $34.75, or a gain of 10.4% for the covered call investor.
The Oct. 4 expiration of $29.00 puts are trading now at 4 cents on the ask side. The investor has made almost all of the 71 cents premium received mentioned in the article.
It now makes sense to enter an order to “Buy to Close” that put option play. Then the investor can enter a new trade to “Sell to Open” a new short-put play at a later expiry period.
Shorting a New Tranche of OTM Puts Today
What would happen if PLTR stock fell precipitously from here? It's not uncommon for that to happen after a stock reaches a peak. Investors can still make some money shorting deep out-of-the-money (OTM) puts. Moreover, it provides a better buy-in entry price for new investors in PLTR stock.
For example, look at the Oct. 25 expiration put options chain, 31 days from today. It shows that the $30.00 strike price options trade for 16 cents on the bid side. That price is over 18% below today's price. Moreover, the short put yield is over one-half of one percent over the next month (i.e., $0.53/$30.00 = 0.533%).
That means that an investor who secures $3,000 with their brokerage firm can enter an order to “Sell to Open” 1 put contract at $30.00 for expiry on Oct. 25. The account will then immediately receive $16.00. Hence, the 0.53% yield (i.e., $16/$3,000 = 0.533%).
This means that the investor's breakeven price is $30-$0.16, or $29.84 per share. That is 18.3% below today's price, providing good downside protection to the short-put investor. Moreover, given the stock's $36 price target from AnaChart's survey of 15 analysts, it potentially allows an investor to get a bargain buy-in price.
Downside Risks
Note that if PLTR stock does not fall to $30.00 in the next month, the short-put investor keeps the income but does not gain any upside in the stock should it rise. Nevertheless, this is a bet that PLTR may fall between now and Oct. 25. It allows the investor to make a little income while they wait and see if the stock will tread water or fall to $30 over the next month.
One potential risk, however, is that if PLTR does fall, the price of these puts will rise. That will show up as a temporary negative return in the investor's brokerage account. They may be forced at that point to wait the full month until Oct. 25 to see if the short-put play expires worthless.
The bottom line is that this is one way to play the apparent peak in PLTR stock. There are other ways, including selling existing PLTR shares or shorting covered calls. You could even do a mixture of all three of these plays, although that would involve investing more capital.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
