Palantir Technologies stock is set to report earnings on Thursday before the market open and implied volatility is elevated at 81%. One way to take advantage of the high volatility over earnings for PLTR stock? Try a cash-secured put.
A cash-secured put involves selling an at-the-money or out-of-the-money put option. The trader simultaneously sets aside enough cash to buy the stock.
The goal here? Either have the put expire worthless in PLTR stock and keep the premium. Or, take assignment of the put option and acquire the stock below the current price.
This trade is very similar to a covered call and quite easy to understand once you know the basics.
Anyone selling put options needs to understand that he or she may get assigned 100 shares at the strike price.
PLTR Stock Today: Trade Setup
For Palantir stock, a trader selling the Nov. 3 put option with a strike price of 15 will generate around $1.00 in premium per contract, based on recent action.
The put seller would have the obligation to purchase 100 shares of Palantir stock at 15 if called upon to do so by the put buyer. Shares fell below 15 in Monday afternoon trading and are poised to drop for a fourth straight session.
The break-even price for the trade: Calculate it by taking the strike price less the premium received. So in this case, we get a break-even price of 14. That's 7.1% below Friday's closing price in PLTR stock.
If the stock stays above 15 at expiry, the put option expires worthless. The profit leaves the trader with a large 7.14% return on capital at risk. That works out to around 521% on an annualized basis.
The main risk with the trade is similar to outright stock ownership. If the stock falls significantly, the trade will suffer a loss, however the loss will be partially offset by the premium received for selling the put.
The Flip Side Of This Trade: Owning Shares
Cash secured puts are a fantastic way to generate a return on stocks the trader is happy to own.
With this example, the trader either generates a 7.14% return in 5 days, or they get to purchase PLTR stock at a reasonable discount to Friday's price.
If Palantir stock trades below 15 and the put gets assigned, investors can then sell covered calls against the position to generate further income.
According to IBD Stock Checkup, PLTR stock ranks No. 3 in its group and has a Composite Rating of 98, an EPS Rating of 81 and a Relative Strength Rating of 98.
Elsewhere, this iron condor earnings trade on Amazon expired over the weekend for a full profit.
Please remember that options are risky and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
