I’m a believer in the space economy — how can I not be? As cited by several experts, the space economy could soon be worth over $1 trillion. Recently, a slew of sector-related enterprises, including earth-imaging specialist Planet Labs (PL), has enjoyed robust upswings in valuation. Still, what goes up has a tendency of coming back down.
In the case of PL stock, it’s possible that the security has risen too far, too fast. In the trailing one-month period, shares have skyrocketed nearly 34% higher. That’s not necessarily unusual given that PL — being priced under $5 per share — is often regarded as a penny stock. But that also means any subsequent corrections can be potentially violent.
To be clear, I’m long-term bullish on PL stock. Several months ago, I discussed the burgeoning technical strength in the security. At the time, the smart money also appeared to be buying aggressive out-the-money (OTM) call options. It seemed back then that speculators anticipated something special was cooking.
Still, earlier this month, PL stock closed at $4.51, a level not seen since June 2023. It seems quite probable that whatever speculators were anticipating in August of this year has come to pass. Continuing to go long right now could lead to temporary losses.
From a conservative standpoint, waiting for a better entry point could be the smart move. However, if you want to take an active and thus more aggressive approach, there’s an option strategy to consider.
Using Empirical Data to Formulate a Course of Action
While the equities market naturally features an ebb and flow, it’s best not to just rely on gut feelings to place our trades. Instead, it’s much more prudent to consider a range of data, especially of the empirical variety.
Using historical pricing information — one of the myriad benefits of a Barchart Premier membership — we can establish a probability matrix for PL stock. On a weekly basis (defined as the percentage difference between Monday’s opening price and Friday’s close), PL features a negative bias. In 189 weeks since its market debut, the equity only saw 86 positive weeks. The remainder were negative weeks, except for two which were flat.
Stated differently, since April 2021, there’s only a 45.5% chance that on any given week, your position would end up in the black by the end of it. Over the past one-year period, the success ratio improved modestly to 48.1%. Even so, PL stock maintains a negative bias.
When looking at the picture from the lens of technical analysis, blowing past prior resistance at $2 and $3 represented significant milestone events. However, it’s important to note that after breaching the $3.50 barrier, the “punchiness” of PL stock faded conspicuously. Plus, the equity is encountering heavy resistance at $5.
If that wasn’t enough of a concern, Friday’s options flow data — which focuses exclusively on big block transactions likely placed by institutional investors — tilted pessimistically, with net trade sentiment landing at $39,400 below parity. Relatively speaking, very little dollar volume ($1,200) was dedicated to bullish transactions.
Tellingly, the professional traders — who previously bought far OTM calls — appear to now be selling these options. Conclusion? In the immediate future, a correction may be likelier.
Deploying a Bear Call Spread on PL Stock
For the aggressive, higher-risk approach, selling bear call spreads — that is, selling a call option and simultaneously buying a call at a higher strike price — could be an enticing opportunity. Such a position allows us to be short PL stock while capping the risk at the long strike (in case the security shoots higher).
While the yield isn’t exciting, the 4/5 call spread — selling the $4 call, buying the $5 call — for the options chain expiring Jan. 17 of next year represents a tempting proposition. In this trade, there’s a chance to keep $20 of income, with the maximum loss coming out to $80 if the speculation goes awry. Barchart notes that the probability of profit comes out to 55.3%.
Realistically, the odds may be slightly better than advertised. For one thing, PL stock has a negative bias, as mentioned earlier. Moreover, the breakeven price for this trade stands at $4.20, which is almost 5% above Friday’s close. That pushes the likelihood of success for bearish traders even more in their favor.
