Is Palantir (PLTR) Overvalued? The Empirical Data Might Surprise You.

It’s perhaps the biggest question plaguing the market right now: are shares of big data analytics specialist Palantir (PLTR) overvalued? On the surface, it’s difficult to disagree with the notion. As of this writing, it’s on pace to clock a return of possibly 40% for the business week ending Feb. 7. That’s just wild but it also means a correction could be coming. Still, you’ll want the data to be the ultimate guide.

Recently, investor and entrepreneur Cathie Wood — through her ARK Invest fund — made waves by selling shares of PLTR stock. In fact, Wood has been hitting the sell button prior to Palantir’s blistering fourth-quarter earnings report, which sparked the aforementioned massive rally in PLTR stock. While the software specialist’s relevance cannot be denied, the remarkable enthusiasm warrants sober reflection: chase too hot of a hand and investors can get burned badly.

Interestingly, my Barchart colleague Will Ashworth recently discussed using various options strategies for risk-mitigated exposure to PLTR stock. However, the one strategy that I liked the most out of the three presented was the long straddle. At time of writing, the straddle is in the money thanks to the call side. Further, afterhours trading suggests that the only regret traders may have is not going directionally biased to the upside.

From a stochastic view of PLTR’s price action (that is, devoid of any other context aside from the temporal), the equity features an upward bias. A position entered at the beginning of the week has a 55.51% chance of rising by the end of it. On a four-week basis, the long odds dip only somewhat to 53.57%.

Now, let’s assume that PLTR stock closes at $112 on Friday, which would mean the security would have gained just under 40% for the business week ending Feb. 7. What’s extraordinary about PLTR is that extreme greed tends to attract greater investor sentiment.

Under the condition of 10% weekly returns or greater, the chances that the subsequent week will see a positive return stand at 60.71%. Over a four-week period, the long odds under the dynamic condition shoots up to 65.38%. Stated differently, PLTR stock responds enthusiastically to FOMO or the fear of missing out.

PLTR Stock is a Bullish Opportunity…with a Twist

Recently, Barchart content partner Zacks Investment Research acknowledged that Palantir’s valuation has hit eye-watering levels. Nevertheless, the research firm states that “[t]he growth is so profound though, that it’s tough to bet against them. And those shorts who had been betting against them have been getting absolutely crushed. Remember folks, the market can stay irrational longer than you can stay solvent.”

Rather than bet against PLTR stock, the data suggests that there’s still room regarding the upside narrative. As stated earlier, investors don’t shy away from Palantir when its equity posts ridiculous performance stats. No, those gains fuel even more optimism. It’s not about debating whether the market is bullish or bearish on PLTR. Rather, it’s about the magnitude of bullishness.

Barchart offers an excellent tool that’s available to all readers of the platform called the Expected Move calculator. Also known as the Implied Move, this indicator reflects the price range that the target security is expected to move from the current price. Specifically, the readout is calculated “based on 85% of the value of the at-the-money straddle.”

Over the next four weeks (assuming an anchor point of Feb. 7), PLTR stock could potentially rise to $124.75 or drop to $97.81. These figures almost match the projected prices based on stochastic calculations of PLTR’s historical price data. However, dynamic projections call for a more conservative target on the upside and a more optimistic projection on the downside.

In other words, Barchart’s Expected Move calculator — for the positive scenario — is assuming a best-case performance of 12.1% off Thursday’s close. That’s probably what market makers are risk-modeling for too. However, my dynamic calculation based on conditional (Bayesian) probabilities suggest that by the end of the March 7 session, PLTR will “only” gain 8.53%.

On the downside, Barchart’s (and probably market makers’) estimation of $97.81 is a bit separated by my dynamically calculated risk target of $103.76 — a magnitude difference of 6.08%.

Still, in my estimation, the key difference is the upside target. I will concede the strong possibility of PLTR stock rising from here. However, the data suggests that the upper volatility curve will encounter negative acceleration in the weeks ahead, not march forward in a linear trajectory as the Expected Move calculator anticipates.

Plotting an Intelligent Trading Strategy

With the market intelligence above, investors may consider a bull call spread (because of the high long odds) with a short strike price of $121 or lower, thus presenting a realistic target to aim for.

When looking at the options chain expiring March 7, arguably the most balanced bull spread is the 103/120 — buy the $103 call, simultaneously sell the $120 call. On the speculative side, PLTR stock may have a good chance of reaching $120, thus securing the maximum payout. But should circumstances go awry, PLTR may fall to around $104. Therefore, the $103 call provides some value by which the spread could offer salvageable value.

However, the drawback of this spread is that it’s expensive: you pay $860 for the chance to earn $840. For a cheaper and riskier trade, you might consider the 115/118 bull spread. Basically, this is the option market’s equivalent of a bootleg pass, with both the long and short calls out of the money. Therefore, PLTR stock must get darn close to the short strike price just to break even.

Still, the net debit paid comes out to only $140 at time of writing for the chance to earn $160. That’s awfully tempting given PLTR stock’s pricing dynamics under FOMO conditions.