Palantir Technologies stock plunged more than 9% on Friday and sharply cut through the 21-day exponential moving average. Though it still sits above its rising 50-day moving average, Friday's pullback could simply be some profit taking after a good run, or due to Russell index rebalancing. Either way, it could be a good buy-the-dip opportunity, which applies only for true market leaders.
The stock rebounded sharply on Monday. It also rejoined IBD Leaderboard as a half-size position.
For traders worried about paying too much for Palantir, a cash-secured put could be an attractive way to potentially buy shares for a discount. Let's take a look at how a cash-secured put trade might look on Palantir stock.
As a reminder, a cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough cash to buy the stock. The goal is to either have the put expire worthless and keep the premium, or to be assigned and acquire the stock below the current price.
It's important that anyone selling puts understands that they may be assigned a contract of 100 shares at the strike price.
Let's assume we're happy to buy 100 shares of Palantir stock at a price of 120 any time between now and Aug. 15.
Potential $825 In Premiums
Selling an Aug. 15-expiration strike put at 120 would generate around $825 in premiums, based on recent trading. The put seller must purchase 100 shares of Palantir stock at 120 if called upon to do so by the put buyer.
The break-even price for the trade comes by taking the strike price less the premium received. In this case, that gives a break-even price of 111.75. That's more than 13% below Friday's closing price.
If the stock stays above 120 at the expiration date, the put expires worthless, leaving the trader with a 7.4% return on capital at risk.
The main risk with the trade is similar to outright stock ownership. If the stock falls sharply, the trade suffers a loss. But the loss gets partially offset by the premium received for selling the put. The maximum loss on the trade occurs if Palantir stock falls to zero, resulting in a loss of $11,175, but most investors cut their losses ahead of that.
Cash-secured puts are a fantastic way to generate a high return on stocks the investor is happy to own. If the put does get assigned, the investor takes ownership with a reduced cost base and can potentially begin selling covered calls to generate additional income from the position.
Palantir Stock Is First In Its Group
Palantir develops software for institutions to protect individual privacy and prevent the misuse of information.
According to IBD Stock Checkup, it ranks first in its group. It also boasts best-possible scores of 99 in its Composite Rating and Relative Strength Rating. Its Earnings Per Share Rating is 98
Palantir plans to announce second-quarter earnings in early August, so earnings risk accompanies this trade.
It's important to 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.
