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A Barchart report shows a large, unusual volume of put options in Palantir Inc. (PLTR) stock for expiration on Friday. The puts are out-of-the-money (OTM), implying investors are bullish on PLTR stock. For example, by shorting OTM puts, these investors can get paid by setting a lower potential buy-in price.
I discussed PLTR's recent rise in a Barchart article on Sunday, Feb. 16: “Palantir Stock Keeps Rising, Confounding Analysts - What Should Investors Do?”
At the time, PLTR was at $119.16, but today it's trading for $123.11 at the market open. My article points out that analysts have been wrong so far on PLTR. I showed how it could be worth as much as $137.39 - although that may take some time.
Today's large volume in put options with strike prices below the trading price (i.e., out-of-the-money), implies that some investors are willing to buy large amounts of shares if PLTR falls to this lower price.
The Barchart Unusual Stock Options Activity Report—see below—shows two tranches of put options with heavy volume that expire on Friday, February. 21.
Investors Put Plays Show a Bullish Stance on PLTR Stock
For example, 14,653 put contracts, each representing 100 shares per contract, traded at $123.00, which is right at the market (ATM). This was 126 times the prior outstanding put contracts at this strike price.
However, the investors who sold these puts to the buyers have received a premium of $2.33 at the midprice. That means the breakeven price is 2% lower:
$123.00-$2.33 = $120.67 breakeven price
$120.67 / $123.11 trading price -1 = -.0198 = i.e., 2% below the trading price
Moreover, the investor's short-put yield at this strike price is almost 1.90%:
$2.33/$123 = 0.0189 = 1.89%
In addition, the second tranche has a lower strike price of $122, but the midprice premium was $1.94. That provides the short sellers a good yield of 1.59% and a lower breakeven:
$1.94 / $122 = 0.0159 = 1.59%
Breakeven = $122-$1.94 = $120.06 = 2.47% below trading price
The second tranche of puts has a better chance of not getting assigned, so the short-put yield is slightly lower. But consider this. The investors who sold these puts must be willing to have their account assigned to buy shares at $122, which is only $1.00 below today's trading price.
That is why there is a delta ratio of -69.53 - implying a good 70% chance this will happen. In other words, these investors are likely to have to buy shares at these strike prices.
That means they are bullish on PLTR stock.
Why PLTR Stock Keeps Rising
In my Feb. 16 Barchart article, I explained why PLTR is confounding analysts. The bottom line is that Palantir's free cash flow (FCF) growth and FCF margins are accelerating as its revenue rises.
That is known as operating leverage. That will push up its FCF margins even higher than its 63% level last quarter. As a result, the future value of PLTR stock, on a FCF yield basis, rises commensurately. I showed how this works in the article.
Analysts don't quite understand this, but many are waking up, as I pointed out. AnaChart's survey shows that the average of 15 analysts' price targets is $125.30.
I pointed out in my article that one way to play PLTR stock is to short deep out-of-the-money (OTM) put options. That way investors can get paid while potentially waiting for PLTR stock to drop to a lower buy-in level.
The bottom line is that PLTR stock is attracting large speculative activity today in put options activity. It shows that some large institutional investors are willing to buy the shares at roughly today's price, albeit getting paid in short-put plays at out-of-the-money breakeven prices.
