Palantir Technologies is set to report earnings on Monday after the closing bell, and the options market is pricing in a 6.8% move in either direction. So, let's look at selling a cash-secured put option in Palantir stock.
Palantir is a leading provider of data analytics software, serving both government and commercial sectors. Analysts anticipate earnings of 9 cents per share, reflecting a 28.6% increase from the same period last year, with projected revenues of $705.1 million, marking year-over-year growth of 26.3%.
Recently, Palantir stock has experienced significant gains, driven by strong demand for its artificial intelligence platforms and strategic partnerships in the defense sector.
Palantir Stock: The Cash-Secured Put
In a cash-secured put, traders take advantage of the high implied volatility around the earnings announcement. A cash-secured put involves selling an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock.
The goal? Either have the put in Palantir stock expire worthless and keep the premium, or take assignment and acquire the stock below the current price.
This trade is very similar to a covered call and quite easy to understand once you know the basics. Anyone selling puts should understand that one might get assigned 100 shares at the strike price.
For Palantir stock, a trader selling the Nov. 8-expiration put with a strike price of 40 will generate around $185 in premium per contract, based on recent trading. The put has a delta of 34, which points to an estimated 66% chance that it will expire worthless.
The put seller would have the obligation to purchase 100 shares of PLTR stock at 40 if called upon to do so by the put buyer.
Calculate the break-even price by taking the strike price less the premium received. So in this case we get a break-even price of 38.15 in Palantir stock, or 9% below Friday's closing price.
Reward And Risk
If the stock stays above 40 at expiry, the sold put option expires worthless. Traders earn a 4.85% return on capital at risk. That works out to an incredible 354% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss, however the loss will be partially offset by the premium received for selling the put.
Cash-secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
With this example, the trader either generates a 4.85% return in a week, or they get to purchase PLTR stock at a reasonable discount on the current price.
If Palantir stock trades below 40 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to IBD Stock Checkup, PLTR stock ranks first in its group and has a perfect Composite Rating of 99, an EPS Rating of 97 and a Relative Strength Rating of 98.
Remember that options are risky and investors can lose 100% of their investment.
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 X/Twitter at @OptiontradinIQ.
