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Tap Into Palantir’s Rally With Risk-Limited Options Trade

Palantir Technologies (PLTR) tested resistance around 27.50 and is clearing that price level Thursday. 




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Palantir Technologies stock shows a Composite Rating of 73, an EPS Rating of 65, and a Relative Strength Rating of 92, and is sitting above rising 21-, 50-, and 200-day moving averages. 

Implied volatility on PLTR is 44%, which is toward the lowest levels seen in the last 12 months. That means options are cheap compared with the previous 12 months. 

When that occurs, it is better to be a net buyer of options rather than a seller. 

One way to trade the stock from the long side in a defined-risk way is using an option strategy known as a bull call spread. A bull call spread is created through buying a call and then selling a further out-of-the-money call. 

Selling the further out-of-the-money call reduces the cost of the trade but also limits the upside. 

Going out to December expiration, a 28-strike price call option was trading around $2.25 Wednesday, and the 33 call was around 90 cents a share. 

Palantir Technologies Stock Trade’s Risk Limited

Buying the 28 call and selling the 33 call would create a bull call spread. The trade cost for a 100-share block would be $135 (difference in the option prices multiplied by 100), and the maximum potential profit would be $365 (difference in strike prices, multiplied by 100 less the premium paid). 

A bull call spread is a risk defined strategy, so if Palantir Technologies closes below 28 on Dec. 17, the most the trade could lose is the roughly $135 premium paid. 

Potential gains are also capped above a 33 share price, so no matter how high PLTR stock might go, the most the trade could profit is $365. 

In terms of trade management, if the spread dropped from $135 to $65, or if the stock dropped below 25, I would consider closing early for a loss. An area to consider taking profits would be if the stock reached 33. 

Earnings Risk For Palantir Technologies Stock Trade

Palantir earnings are set for early November, so there would be earnings risk with this trade unless it is closed before then. 

More aggressive traders may prefer to just buy the 28-strike call. A long call trade has unlimited upside potential. 

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, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ 

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