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Shorting out-of-the-money puts in Palantir Inc (PLTR) stock might be a good income opportunity. It could also be a good buy-in point in PLTR stock. This is based on a higher target price based on its strong FCF.
I discussed this play in my May 28 Barchart article, “Palantir Stock Still Has Good Upside Based on Its FCF Margins - Short Put Strategies Work.” At the time PLTR was at $21.15 and I discussed shorting the $20.00 put option expiring today on June 21.
This has worked out well since today PLTR is trading for $24.30. That means that the investor kept the $0.33 premium income (i.e., a 1.65% yield over 3 weeks) with not obligation to buy shares.
Now this trade can be repeated again. The investor can let the existing short sale expire worthless (or else buy it back for $0.01 today). Then they can roll it over again for a new yield play.
Shorting OTM PLTR Puts
For example, look at the PLTR put options expiring on July 12, three weeks from now. It shows that the $22.50 strike price put option has a bid side premium of 28 cents.
That provides an immediate yield of 1.24% to the short seller of this put. Moreover, it is out-of-the-money (OTM) by almost 7% (6.91% below the spot price).
This means that any investor who secures $2,250 with their brokerage firm can enter an order to “Sell to Open” 1 put contract at $22.50 for expiry on July 12. The account will then immediately receive $28. Or for 10 puts you secure $22,500 and then receive $280. Either way, the immediate yield is 1.24%.
Downside Risk and Upside
The investor is expecting that the stock won't fall to $22.50 on or before July 12. But even if it does, the investor's cash will be used to buy 100 shares at $22.50. This is not the worst possible thing for the investor.
For one, the breakeven point is lower at $22.50-$0.28, or $22.22 per share. This is 8.63% below today's price.
However, as I showed in my last article, PLTR could easily be worth significantly more than this price. I had a $26.92 price target on the stock based on its strong free cash flow. That would mean that the investor could simply hold on to their new shares if they were obligated to buy them under this short put play.
Moreover, they could also sell covered calls in higher or OTM call prices. That would bring in extra income that could help cover any unrealized losses.
The bottom line is that PLTR stock still looks cheap here. One way to play this is to short OTM put options in nearby expiry periods.
In this case, this is a rollover and repeat play of an earlier short put play. In effect, the short seller following both plays has not picked up 1.65% from the first short put play and 1.24% today, or 2.89% expected return. That provides significant downside protection as well as a good income opportunity.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
