With the price pullback over the last month, and an earnings announcement coming up in less than two weeks, data analytics company Palantir, is setting up for a very interesting and very high upfront income generating options trade. We successfully implemented a similar Palantir trade at the end of November, but those contracts expired (quite profitably) on January 15, and conditions are again attractive for a similar trade. In this report, we review the trade details. We believe it’s an attractive trade to place today and potential over the next few trading days, as long as the price doesn’t move too dramatically before then.
Palantir Technologies (PLTR)
Palantir builds and deploys software platforms for the intelligence community, and the shares just recently started trading publicly within the last five months. You can access our full report on Palantir here.
Palantir Share Price:
The share price volatility (as you can see in the chart above), has created a very attractive trading opportunity. Specifically, the upfront premium income available in the options market is higher when volatility is higher (like it currently is for Palantir), and we especially like the set up considering the added volatility (and premium income) due to the upcoming earnings announcement on February 16th. We also like the business—a lot—it’s just the current valuation and volatility that gives us pause (in terms of purchasing shares outright), and also makes this options trade particularly attractive.
The Trade:
Sell Put Options on PLTR with a strike price of $26 (~20% out of the money, it currently trades at ~$32.50), and with an expiration date of February 19, 2021, and for a premium of $0.60 (this comes out to approximately 2.3% of extra income in just 15 days, and approximately 55.4% extra income on an annualized basis). This trade not only generates attractive upfront premium income for us now, but it gives us a chance at buying shares of this very attractive business at a more reasonable price ($26—the strike price) if the market price falls below $26 and the shares get put to us before this option contract expires in 15 days. And we get to keep the upfront premium income no matter what.
*Important Note: Depending on your preferences, and how badly you do (or don’t) want to have the shares put to you, you can adjust the strike price and/or expiration date.
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 a very attractive long-term business (as we wrote about in the report linked above), but the price/valuation seems a bit speculative considering it’s still only operated as a public company for less than 6 months and its valuation is somewhat robust (a lot of future success is already priced in considering it currently trades at 49.4x sales, more on this in a moment). We’d be much more comfortable owning these shares if we could get them at a significantly lower price, and that is exactly what this trade is designed to do. Plus, we get to keep the upfront premium income this trade generates, no matter what (i.e. whether the shares do or don’t get put to us).
Important Trade Considerations:
Two important considerations when selling put options are ex-dividend dates and quarterly earnings announcements because they can both impact your trade. Palantir doesn’t pay a dividend (so that factor is off the table), however the company is expected to announce earnings on February 16th (just 3 days before this options contract expires) and that adds significant uncertainty to the price. However, it is this uncertainty that has caused the upfront premium income available on this trade to be so significant. An because we like this business over the long-term, we’d be happy to pick up more shares at the 20% lower price of $26 if they get (if the price falls to below $26 before this options contract expires in just 15 days).
Conclusion:
We like Palantir’s business. It is attractive. However, the valuation gives us pause. Specifically, Palantir last forecast (guidance) 2020 total revenue (we’ll find out for sure in 12 days) to $1.071 billion, but the shares already have a market cap of $55.33 billion. That is a price-to-sales ratio of 51.7x (very high). The company does expect that year-over-year revenue growth will be over 30% in 2021, which is a lot, but at that rate it would still several years for the price-to-sales ratio to get down to the more reasonable level of 10x. Said differently, there are some very high expectations baked into this strong business at a share price of $32.50, and we’d be much more comfortable owning it at $26.00/share (if the price falls that far before our options contract expires in 15 days, and the shares get put to us). And if they don’t get put to us, we’re happy to simply keep the attractive upfront premium income generated by this trade (we get to keep that income no matter what).
Worth mentioning, we do currently own a very small position in Palantir shares, but we’d be happy to add more if the price falls below $26 and the shares get put to us before this options contract expires in less than two weeks.
Note: options contracts trade in lots of 100, so to secure this trade with cash, you need to keep $2,600 of cash in your brokerage account per each contract ($26 strike price x 100).