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It shouldn't have surprised anyone that Palantir (PLTR) reported excellent Q4 2024 results on Monday. The company’s four software platforms have gobbled up hundreds of millions in revenue from companies and governments eager to use Gotham, Foundry, Apollo, and AI to make critical decisions for their enterprises.
I've been on the Palantir bandwagon for a while. I'm not a techie, but it’s been clear for at least a year, probably longer, that CEO and founder Alex Karp had a clear vision for the business, one that's vital to a growing tech company.
In Wednesday's options trading, it had a volume of 962,127, 1.4x its 30-day average. That followed Tuesday’s whopping 2.13 million, or 3.1x the 30-day average, and the highest amount over the past three months.
Most recently, on Jan. 7, I suggested that Palantir is a long-term buy.
“While the road could be bumpy in 2025, it’s hard not to like the profit machine Karp is building. At the end of 2020, Palantir had an EBIT loss of $1.17 billion. As of Sept. 30, its trailing 12-month EBIT profit was $365.2 million. S&P Global Market Intelligence estimates they will hit $1.06 billion in 2024, a 200% turnaround over four year,” I wrote.
Its EBIT profit came in a little higher at $1.13 billion. According to S&P Global Market Intelligence, analysts expect it to grow to $2.82 billion by 2027, more than doubling its current profitability.
With a nosebleed valuation, if you haven’t bought Palantir shares yet, you might want to use one of these three unusually active options to make it happen without overpaying.
Option 1
In yesterday's trading, Palantir had 42 unusually active options—I define these as options with Vol/OI ratios of 1.24 or higher and expiring in a week or more—with five over 10.
The only one I’d dismiss outright, if you’re selling and not buying, is the Aug. 15 $90 put. With 191 days to expiration, a significant correction could occur, forcing you to purchase the shares at $90, and generating a potential loss if the strike price drops significantly below the current price.
However, if you’re buying shares at current prices--$107.68 as I write this two hours into Thursday trading--buying the put provides nice protection against the downside for about 12% of the share price.
This would be the mild way to play its unusually active options.
Option 2
The medium play is to buy 100 shares and write a covered call on the Feb. 14 $103 strike that expires in eight days.
Looking at the $103 call in today’s trading, the probability that it expires a week tomorrow OTM (out of the money) is 41.89%, so it's not quite a coin toss. However, should it expire out of the money, your annual return would be 217.7%, producing a very nice income play.
Unfortunately, should it stay ITM (in the money) until expiration, you could be asked to sell the shares at $103 by the buyer of the call. You’d be in a loss position if Palantir’s share price is above $109.80 ($103 strike price + $6.80 bid price).
Palantir is currently 17th in Barchart’s Top 100 Stocks to Buy. This suggests that the stock’s momentum continues, making a covered call a dicey proposition at the $103 strike.
If you go 20% OTM and sell the $130 call, the OTM probability increases to 94.70%, suggesting you’ll generate an annualized return of 958%. The calculation is below,
To calculate the annual return, you first calculate the potential return, which is the time premium divided by net debit.
Time Premium = $130 strike price - $0.36 bid price - $107.80 share price = $21.84
Net Debit = $107.80 share price - $0.36 bid price = $107.44
Potential Return = $21.84 / $107.44 = 20.3%
Annualized Return = 20.3% / 8 * 365 = 926.2%
As I like to say, even though I’ve been writing about options for over two years, I’m still a newbie, so I couldn’t give you a definitive answer as to why my numbers differ from those in the image above, but I think you get a general idea.
Option 3
The third and final option is the hottest in terms of risk. In this strategy, you do a long straddle, which is when you buy a call and put it at the same strike price. In this case, I’ve chosen the $98 put from the five with high Vol/OI ratios.
The long straddle succeeds if the share price moves above the upside breakeven or below the downside breakeven by expiration, which, in this case, is 15 days from now.
The call and put cost (net debit) is $13.16, or 12.32% of Palantir’s share price. You want the share price to move above $111.16 [$98 strike + $13.16 net debit] or below $84.84 [$98 strike - $13.16 net debit]. If it doesn’t, you’re out $1,316.
The profit probability is just 40.4%, so the inverse is that your probability of a loss is 59.6%, well above 50/50.
