Palantir Stock is at a Peak - Put Premiums are High - Worth Shorting for Income

Palantir Technologies (PLTR) stock is now at a peak price, pushing its put option premiums very high. Deep out-of-the-money (OTM) puts in near-term expiry periods are trading at high yields, making them worth shorting.

PLTR is at $43.47 in midday trading on Monday, Oct. 13. It's up over 80% in the past two months, since closing at $24.09 on Aug. 5.

As a result, its put option premiums have skyrocketed. For example, I wrote about shorting PLTR OTM put options in my Sept. 17 Barchart article, “Palantir Stock Keeps Rising - Is It Overvalued or a Bargain?.”

At the time a 12% out-of-the-money put option was trading for a yield of 0.875% (i.e., 0.28 premium/$32.00 strike price). That put expired worthless, making money for short put investors and even more money for long investors in PLTR who also shorted this put option.

But today, a 12% out-of-the-money (OTM) put has an even higher yield. Let's look at this play.

Shorting Deep OTM Puts in PLTR

For example, look at the Nov. 8 expiry period, 25 days from or a little over 3 weeks. It shows that the $38.00 strike price put option, which is 12.5% lower than today's trading price, has a bid side premium of 91 cents.

That means that the short seller of these puts can make an immediate yield of 2.39% (i.e., $0.91/$38.00). That is much higher than the 0.875% yield 3 weeks ago for a 12% OTM put.

Here is what this means. An investor who secures $3,800 in cash and/or buying power with their brokerage firm enters an order to “Sell to Open” 1 put contract and immediately receives $91.00. That works out to 2.395% for just over three weeks.

That is a fantastic expected return (ER). For example, if these put option premiums stay elevated for the next quarter, the investor can repeat this play and make an ER of 9.58% (i.e., 2.395% x 4).

Downside Issues

Keep in mind that the investor who does this gets no upside from owning PLTR stock if it rises. That is why it makes sense for existing Palantir shareholders to do this. They get the best of both worlds - any upside in PLTR (or downside) plus the income generated from shorting the puts.

What if the stock tumbles? That could force the investor to buy shares at $38.00 if the price hits $38.00 or lower. However, the collateral from the cash-secured with the brokerage will be used.

Keep in mind that the investor's breakeven point in that case is actually lower. The $38.00 purchase price is lower due to the 91 cents in income already received. So the breakeven level is $37.09, or 14.9% below today's price.

That gives the put option short investor good downside protection. Buying PLTR stock at that 15% lower price may be a good entry price. Here's why.

Analysts' Target Prices

Analysts have been raising their target prices for PLTR stock. For example, AnaChart reports that the average price target for 15 analysts is now $42.16 per share. That is roughly at today's price, but it is substantially higher than before.

For example, three weeks ago, I reported that AnaChart's average price target was $34.74 per share. So, analysts have been continuously raising their price targets.

The bottom line is that analysts see higher value in the company. So owning it at $38.00 if it falls 15% may not be such a bad thing for short-put investors.

Moreover, even if the shares are assigned to short-put investors at that price, there are alternatives to alleviating any unrealized losses. For example, an investor can continue to enter new short-put plays to generate more income. In addition, they can also sell out-of-the-money (OTM) covered calls. In fact, the investor could do both trades at that point, although that would involve securing more capital.

The bottom line is that taking advantage of these high put option premiums might be a worthwhile short-term trading strategy.

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On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.