Given the dramatic rise of artificial intelligence, it’s no shock to see big data analytics firm Palantir Technologies (PLTR) swing higher. At the same time, valuation concerns present an obvious challenge to interested investors. Still, with options trading, it’s possible to allow other market participants to do the heavy lifting in PLTR stock. Therefore, I’m bullish on the enterprise but with a caveat.
That caveat is that investors must approach Palantir in a sensible manner. Yes, Palantir is “attracting a growing roster of government and corporate clients,” as TipRanks reporter Gabe Ross mentioned. Further, the company could expand into new sectors, particularly healthcare and hydrocarbons.
Use Unusual Options Activity in PLTR Stock to Your Advantage
One of the relatively recent functionalities on TipRanks is its unusual options activity screener. This data interface identifies transactions occurring in the derivatives arena that is pinging at a higher-than-normal volume. Stated differently, the screener tracks the activity of the smart money: either professional traders or institutional buyers.
Let’s assume that you’ve already made up your mind that you will purchase PLTR stock call options in the anticipation that the underlying security will march northward. However, because the security is highly in demand, the calls aren’t cheap. Technically speaking, they carry a higher-than-normal premium and that premium raises the call’s breakeven threshold.
Fortunately, you can use the strong demand for PLTR stock to your advantage with a Bull Call Spread. You’re going to buy a call option and simultaneously, you’re going to sell a call at a higher strike price. Why? By selling the call, you can use the credit (income received) to partially offset the debit paid of the bought (long) call. And by selling an in-demand call (hence, the unusual options screener), you can get more credit.
Working with a Real-World Example
Of course, the options market is much more volatile than the open market, featuring significant fluctuations in underlying premiums. Therefore, you should always consult current market dynamics before placing a wager. Nevertheless, we can work through a real-world example of a Bull Call Spread for illustration purposes.
At the moment, I’m noticing that there’s relatively strong demand for the $46 call with an expiration date of Dec. 6, 2024. That tells me that the premium for selling this call will be higher than it usually would be. From a bullish perspective, that’s good news because we can use the proceeds — a bid price of $2.90 — to help offset the debit of, say, the $41 call, which carried an ask of $6.30.
In my view, $6.30 is an expensive premium not only because of the cost but also that PLTR stock must rise to $47.30, just to break even. However, because of the $2.90 credit received from the short leg of the Bull Call Spread, PLTR can break even at $44.40. Should the security hit or exceed $46, we can receive the maximum return of $1.60.
Taking What the Market Will Give Palantir Bulls
To be clear, the point about this trade isn’t to highlight a specific transaction. Rather, it’s to show how investors can leverage market data to their advantage. By taking what the market will give us, we can still participate in hot ideas like PLTR stock.
As the unusual options activity screener demonstrates, traders are taking longshot odds by buying out-the-money (OTM) calls. Stated differently, they believe in PLTR stock so much that they’re willing to pay a premium for the right to buy shares at an elevated rate, anticipating that the equity will rise even higher.
You might like PLTR stock but maybe not to that extreme. Therefore, you can sell the hot ticket and buy yourself a more realistic proposition (that is, a call at a lower strike price) at a discount. You’re still bullish on Palantir but you’re going about it in a more cerebral manner.
Don’t Ignore These Risks
Nothing in the market is risk-free and Bull Call Spreads are no different. With options, you run the risk of losing everything that you put into the trade (since options always expire). If the position doesn’t move favorably, there’s little you can do to “save” the principle.
The other risk regarding Bull Call Spreads is that while the downside is capped, so is the upside. The most you can profit from the above trade is $1.60. On the other hand, buying a straight call features theoretically unlimited upside.
Nevertheless, options always expire so the upside is limited no matter what. Since option spreads are typically short-term affairs, the underlying stock might not have much time to run anyways. Therefore, the Bull Call Spread — with the inherent discounting of the long leg of the transaction — can be a powerful and practical weapon in your arsenal.
Wall Street’s Take on Palantir Technologies
Turning to Wall Street, PLTR stock has a Hold consensus rating based on four Buys, seven Holds, and six Sell ratings. The average PLTR price target is $27.85, implying 37.92% downside risk.
The Takeaway: Use Options Data Wisely for PLTR Stock
While Palantir Technologies has benefited richly from the AI boom, it’s also fair to point out that PLTR stock appears overpriced. There’s an argument to be made that the net fundamentals should lean positively for the tech firm. Even so, it’s important for traders to approach PLTR smartly. On that note, a Bull Call Spread — especially one with a short leg incorporating a heavily demanded strike price — can be an astute way to profit from this hot ticket.
