Palantir Technologies bounced nicely off its 50-day moving average Tuesday and could be a good candidate for bullish option traders. Those looking for a way to play Palantir stock via options could use a bull put spread.
A bull put spread is a defined-risk strategy, so you always know the worst-case scenario in advance. This type of trade will profit if Palantir stock trades sideways or higher and even sometimes if it trades slightly lower, offering flexibility in uncertain markets.
The strategy involves simultaneously selling a higher strike put option while buying a lower strike put option in the same expiration cycle.
In exchange for selling the bull put spread, the trader receives the option premium and has risk equal to the difference in strike prices, less the premium received.
Palantir Stock Bull Put Spread Setup
Palantir recently had a shakeout below its 50-day line but on Sept. 5 it seemed to get support. The low of that day is around 148 and if the stock falls below that, the pattern would look suspect. The 50-day itself is also a good line in the sand and currently stands at 158.
Traders who think Palantir will stay above it's 50-day line for the next two weeks could sell a Sept. 26 bull put spread between 155 and 150 for around 90 cents a share. On a 100-share contract, selling this spread would generate roughly $90 in premium with a maximum risk of $410.
If the spread expires worthless that would be a 22% return in two weeks, provided Palantir stock is above 155 at expiration. The maximum loss would occur if Palantir closes below 150 on Sept. 26, which would see the premium seller lose $410 on the trade.
The break-even point for the trade is 154.10, which is calculated as 155 less the 90 cents in option premiums per share. That's 7.6% below the price of 166.80 at the time of this writing.
It's best to set a stop-loss if the stock breaks back below its 50-day line, or if the spread increased in value from 90 cents to $1.80. Sticking to this stop-loss level will help avoid large losses if the stock drops.
Works In Current Market Environment
For investors seeking income generation with defined risk parameters, this Palantir bull put spread presents an appealing opportunity in the current market environment.
Investor's Business Daily gives Palantir a Composite Rating of 98 out of a best-possible 99. Its Earnings Per Share Rating is 98 as is its Relative Strength Rating. According to IBD Stock Checkup, Palantir stock ranks first in its group.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
