Data Mining Software Group Palantir Technologies (NYSE 🙂 announced Q4 and FY20 on February 16. After the release, its shares were volatile and came under pressure.
We recently discussed in detail how investors might consider writing covered calls. Readers who are new to options may want to revisit that article before reading this post.
Today we are going to look at using an options strategy with Palantir stocks. This piece should help the reader increase the understanding of options. For more experienced investors, it likely offers ideas for future trades.
Palantir Technologies
Current price: $ 29.49
52 Week Range: $ 8.90 – $ 45.00
Price change year-to-date (YTD): Up about 22%
Palantir Technologies Weekly Chart.
Denver-based Palantir Technologies was founded in 2003 by Internet entrepreneur Peter Thiel and colleagues. Many may remember him as one of the founders of Confinity, which merged with X.com, an outfit created by Elon Musk, the current CEO of Tesla (NASDAQ :). The post-merger company became PayPal (NASDAQ 🙂 and received its first public offering (IPO) in February 2002.
Thiel was also one of the early donors of Facebook (NASDAQ :).
Since its inception, there has been significant interest in Palantir Technologies. For example, the collaboration with various government agencies, such as the US Central Intelligence Agency (CIA), is considered secretive and even controversial.
PLTR shares were traded on the Big Board on September 30, 2020. Instead of an IPO, the company had a direct listing (DPO). This means that, unlike offering new PLTR shares, existing shareholders have sold some of their shares to new investors.
Since its market debut, with an opening price of $ 10, PLTR shares have seen a significant rise. At the end of January, the stock hit a record high of $ 45.
So the proverbial $ 1,000 invested in PLTR stock at the time of its public debut would now be worth about $ 2,900.
The forward P / E and P / S ratios are 263.16 and 55.10 respectively, indicating a frothy rating level even for a growth stock like Palantir.
As a momentum stock, PLTR stocks are likely to be volatile in the near term. Selling pressure around the date of an earnings report is also common with growth companies. Therefore, a covered call may be a suitable strategy for some investors.
Covered Calls on PLTR Stock
For every 100 shares held, the strategy requires the trader to sell one call option with an expiration date. date sometime in the future.
As we write this, Palantir's stock is trading at $ 29.49. A stock option contract on PLTR (or any other stock) is the option to buy (or sell) 100 shares.
Investors who believe that more short-term profit could be taken soon, could use a somewhat in-the-money (ITM) covered call. A call option is ITM if the market price (here $ 29.49) is higher than the strike price.
So the investor would buy (or already own) 100 Palantir shares for $ 29.49 while selling a PLTR March 19, 2021, 28-strike call option. This option is currently being offered at a price (or premium) of $ 4.72.
A buyer of an option would have to pay $ 4.72 x 100 (or $ 472) in premium to the seller of the option. This call option will stop trading on Friday, March 19, 2021.
The 28-strike offers more downside protection than a phone call (ATM) or out-of-the-money (OTM).
Assuming a trader entered this covered call trade at $ 29.49, the maximum return at maturity would be $ 323, i.e. ($ 4.72 – ($ 29.49- $ 28 )) x 100, excluding trade commissions and fees.
] Risk / Reward Profile for Uncontrolled Covered Call
The maximum profit from an ITM covered call is equal to the extrinsic value of the short call option.
The intrinsic value would be the tangible value of the option if it were exercised now.
Thus, the intrinsic value of our PLTR call option is ($ 29.49- $ 28) X 100, or $ 149.
Extrinsic value is the difference between the market price of an option (or its premium) and its intrinsic price. In this case, the extrinsic value would be $ 323, i.e. ($ 472 – $ 149). Extrinsic value is also called time value.
The trader realizes this $ 323 profit as long as the price of PLTR stock at maturity remains above the strike price of the call option (i.e. $ 28).
At maturity, this transaction would break even at a Palantir stock price of $ 24.77 (i.e. $ 28- $ 3.23), excluding trading commissions and fees.
Another way to think of this breakeven price is to subtract the call option premium ($ 4.72) from the underlying PLTR stock price when we initiated the covered call (i.e. $ 29.49).
On March 19, if the PLTR stock closes below $ 24.77, the transaction would start to lose money within this covered call setup. By selling this covered call, the investor thus has some protection against a potential loss in the event of a fall in the underlying stock. In theory, the price of a stock could fall to $ 0.
What if Palantir stock hits a new record?
As we have noted in previous articles, such a covered call would increase the upside profit potential. The risk of not fully participating in the potential appreciation of the PLTR stock would not appeal to everyone. However, within their risk / return profile, others may find that acceptable in exchange for the premium received.
For example, if Palantir stock hit a new record and close at $ 46 on March 19, the trader's maximum return would still be $ 323. In that case, the option would be deep ITM and likely exercised. There may also be brokerage fees if the stock is called away.
Bottom Line
In the long run, we are optimistic about Palantir Technologies. However, as a technology company that has recently started trading, its stocks are likely to be choppy.
The exact market timing of when PLTR stocks could take a breather is difficult to determine, even for professional traders. But options strategies provide tools that can prepare for sideways moves or even declines in stock prices.
There are many angles involved in using different options for hedging or speculative purposes. Interested readers may want to consider investing the time and effort to further educate themselves.
Meanwhile, based on the comments from readers posted in the past two weeks, we appreciate that there is an interest in understanding the details of covered calls and other types of options.
In the future, we hope to expand the range of options that may interest more readers.
