Palantir is a highly rated stock with high volatility, which means high option premiums.
Income investors might consider a strategy known as a covered call.
A covered call strategy is one way to slightly reduce the risk on a long stock position while also generating some premium. The catch is that upside is limited above the covered call strike.
Let's look at how a covered call trade on Palantir might take shape.
Buying 100 shares of Palantir would cost around $3,232 based on Tuesday's closing price.
An Oct. 18, 34-strike call option was trading around $1.88, generating $188 in premium per contract.
Palantir Stock Trade Returns 11.7%
Selling the call option generates an income of 6.18% in just under two months, equaling around 38.21% annualized.
If Palantir closes above 34 on the expiration date, the shares will be called away at 34. That would leave the trader with a total profit of $356 (the gain on the shares plus the $188 option premium received).
That equates to an 11.7% return, which is 72.35% on an annualized basis.
Of course, the risk with the trade is that Palantir stock might drop, which could wipe out any gains made from selling the call.
Covered calls can be an effective strategy for generating income, managing downside risk, and reducing the effective purchase price of a stock.
Lower-Risk Strategy In Volatile Market
Palantir stock could be a lower-risk option during a period of heightened market volatility.
According to the IBD Stock Checkup, Palantir stock is ranked No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 96 and a Relative Strength Rating of 97.
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 X/Twitter at @OptiontradinIQ
