High growth stocks have been selling off hard as the market is fearful of the fed’s indication of higher interest rates (as the "pandemic trade" continues to unwind). This has created an attractive opportunity to generate high upfront premium income in the options market. In this report, we share an income-generating options trade on an attractive long-term growth stock that has simply sold off too hard as a result of the market’s latest volatility and fear. In fact, premium income available goes up when short-term fear is high, and that is a big part of the reason why this trade is particularly attractive. We believe this is an attractive trade to place today and potentially over the next few trading sessions as long as the price of the underlying shares doesn’t move too far before then.
Palantir (PLTR)
As we have written about in the past, Palantir is a big data company. Specifically, it’s big data software analytics platforms (such as Gotham, Foundry and Apollo) help organizations (government, and now increasingly commercial) integrate and manage existing disparate data sets to extract meaningful insights. And Palantir continues to grow rapidly as it helps maintain data security and privacy, while also enabling cloud-based access—areas with explosive long-term growth trajectory (i.e. there is a very large total addressable market for Palantir).
Palantir Share Price
Despite the explosive growth and attractiveness of Palantir as a long-term investment (as we wrote about here), the shares have recently sold off hard thereby creating this attractive high-income opportunity.
The Trade:
Sell Put Options on PLTR with a strike price of $15.50 (~8.6% out of the money, it currently trades at ~$16.96), and an expiration date of January 21, 2022, and for a premium of at least $0.30 (or $30 because options contracts trade in lots of 100). This comes out to approximately 1.9% of extra income in about 2 weeks—which may not sound like a big return—but it is very significant for such a short time frame (it’s approximately 50% of extra income on an annualized basis, if you could implement similar trades throughout the year). 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 ($15.50—the strike price) if the market price falls below $15.50 and the shares get put to us before this option contract expires on January 21st. And we get to keep the upfront premium income no matter what.
Important to note, you can adjust the strike price of this trade (for example to $16 or $14) 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).
*Also note, market prices are constantly moving, and you will have to “work” this trade a little to get a price you like. Regardless, the current high premium income is attractive.
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, despite the near-term volatility, and we’d love to own shares (as a long-term investment) if they fell to a purchase (strike) price of $15.50. In Palantir’s most recent earnings announcement, the results indicated that their new corporate clients are growing even faster than their “bread and butter” government clients, and this bodes extremely well for the long-term prospects of the company.
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 well 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 deciding 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:
Palantir is an attractive, high-growth, profitable, big data company that is trading at an attractive price (valuation). We fully expect the share price to remain volatile in the week’s ahead, but over the long term we expect the share price to go dramatically higher.
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 2 weeks).