July 17, 2023
Before getting into this week’s trade, did you see what happened to the Chewy (CHWY) call spread from early June? Despite my bearish leanings, the stock took off, gaining as much as 15% at one point. That put the entire spread into the money and the trade in the red. The stock pulled back a bit but stayed close to the short 38 call strike. On Friday (expiration day), CHWY rallied to hit a high of 38.95. But luck was on our side, as the stock closed at 37.99, a mere penny out of the money. But it might as well have been 10 dollars, because the spread expired worthless either way, resulting in a max win of around 29%. That’s 13 winners among the past 15 expired positions. I hope you’ve been taking part in this hot streak.
As for today’s trade, I wasn’t feeling the love from the few bank stocks that kicked off earnings season this week. So, I’m going with a stock that reports on Aug.7, which means this trade will be live through earnings. It’s on Palantir Technologies (PLTR), which was founded by a group of heavy hitters, including Stephen Cohen and Peter Thiel, who named the company after the magical “seeing stones” from Lord of the Rings. PLTR has an aura of mystery surrounding it, as it provides AI-based software infrastructure to the federal intelligence community. More recently, it’s expanded into state and local governments as well as private companies in the healthcare and financial sectors.
Since its last earnings report in early May, PLTR has gained more than 110%. But that comes after the stock lost nearly 90% in two years, bottoming out in January of this year. Thus, there is plenty of upside room before hitting any key price levels. Analysts are neutral toward PLTR, though price target changes have recently been to the upside. That said, the current average price target is 30-40% (depending on the source) below PLTR’s current price. That’s not something you see very often, especially for a stock that’s doubled in three months. I like the sentiment setup for this trade, as PLTR should benefit from upgrades and target price increases that are more in line with the stock’s recent price action.
This trade is a bet that PLTR will get a boost after earnings, which should reflect the company’s expanded customer base. We’re choosing a short put strike that is below the 20-day moving average, which the stock has respected throughout its recent rally. That said, this is an aggressive trade that is being held though earnings. So, size your position appropriately.
If you agree that PLTR will continue to respect the 20-day moving average (blue line), consider the following credit spread trade that relies on the stock staying above $15 (red line) through expiration in 5 weeks:
Buy to Open the PLTR 18 Aug 13 put (PLTR230818P13)
Sell to Open the PLTR 18 Aug 15 put (PLTR230818P15) for a credit of $0.50 (selling a vertical)
This credit is $0.04 less than the mid-point price of the spread at Friday’s $16.40 close. Unless PLTR surges sharply at the open on Monday, you should be able to get close to that price.
The commission on this trade should be no more than $1.30 per spread. Each spread would then yield $48.70. This trade reduces your buying power by $200, making your net investment $151.30 per spread ($200 – $48.70). If PLTR closes above $15 on Aug. 18, the options will expire worthless and your return on the spread would be 32% ($48.70/$151.30).
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