Palantir: Selling Put Options, Lots of Cash

Big data software company Palantir has become an emotional stock for many people with widely ranging viewpoints. And these differing viewpoints have created volatility that leads to high premium income (i.e. cash) being available in the options market. In this report, we share a high income-generating options trade on Palantir that we believe is attractive to place today and potentially over the next few trading sessions, as long as the price of the underlying shares doesn’t move too widely before then.

Palantir (PLTR)

Palantir is a software company, that is growing rapidly, and it has a massive total addressable market. It provides big data analytics solutions (ranging from data mining to visual analytics), on a single consolidated platform, thereby enabling informed decision-making. The company is having great success landing and expanding government agency contracts, but is also recently attempting to diversify into enterprise-grade commercial organizations too.

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The Trade:

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Sell Put Options on PLTR with a strike price of $22 (~13.3% out of the money, it currently trades at ~$25.37), and an expiration date of July 16, 2021, and for a premium of at least $0.27 (or $27 because options contracts trade in lots of 100). This comes out to approximately 1.22% of extra income in less than one month—which may not sound like a big return—but it is very significant for such a short time frame (it’s approximately 14.7% of extra income on an annualized basis, if you could implement similar trades throughout the year calculated as ($0.27/$22) x 12 months). And this trade not only generates attractive upfront premium income for us now, but it gives us a chance at buying shares of this attractive long-term company at a significantly lower price ($22—the strike price) if the market price falls below $22 and the shares get put to us before this option contract expires in just under 1 month. And we get to keep the upfront premium income no matter what.

Important to note, your broker will require you to keep $2,200 of cash in your account ($22 strike x 100 shares) to secure the trade (assuming you don’t want to use margin).

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Also important to note, you can adjust the strike price of this trade (for example to $23) depending on how badly (and at what price) you want the shares put to you, and to generate a different amount upfront income as shown in the table above).

Your Opportunity:

We believe this is an attractive trade to place today, and potentially over the next few trading days, as long as the price of PLTR doesn't move too dramatically before then and you’re able to generate enough premium income to your liking.

Our Thesis:

Our overall thesis is simply that PLTR is an attractive long-term business, despite the near-term volatility, and we’d love to own (more) shares (as a long-term investment) if they fell to a purchase (strike) price of $22. But if these shares do not get put to us, then we’re also happy to simply keep the very high upfront premium income that is generated by this trade.

We recently went into great detail about our views on Palantir in this report.

Important Trade Considerations:

Two important considerations when selling put options are ex-dividend dates and earnings announcements because they can both impact your trade. In PLTR’s case neither one is a concern because PLTR doesn’t pay a dividend, and because it isn’t expected to announce earnings again until August (after this trade expires). If the company announced earnings before this contract expires—that would add significant uncertainty risk to the trade, and we’d have to take that into consideration when decided what amount of premium we’d be willing to accept. As the trade stands, the high premium income more than compensates us for the volatility risk, in our view (especially considering if the shares get put to us, we like them as a long-term investment).

Conclusion:

PLTR is an attractive business. It has a very lucrative government contract business that is growing rapidly, and can keep growing rapidly for a long time based on the large total addressable market. It is also working to grow its corporate client business too, and is having some success so far with these newer initiatives in this additional large total addressable market opportunity.

For these reasons, we believe the trade described in this report is very attractive. Specifically, it puts a high amount of upfront income in your pocket right away (that you get to keep no matter what) and it also gives you a chance to pick up shares of this attractive business at a significantly lower price if they fall below the strike price and get put to you before the options contract expires (in just under one month).