Palantir (PLTR) is on a tear this year. It started around 16 and now trades above 60. With a 274% rise so far this year, Palantir stock could continue its amazing run or suffer a swift pullback. How to profit when you expect a big move but aren’t sure of the direction? That’s where a breakout trade such as a long strangle is good to have in your toolbox.
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Why Today Was The Day To Be Aggressive
Palantir has stellar ratings. According to the IBD Stock Checkup, Palantir stock is ranked No. 1 in its industry group and has a Composite Rating of 99, an EPS Rating of 97 and a Relative Strength Rating of 99.
Setting Up A Long Strangle On Palantir Stock
A long strangle is constructed through buying an out-of-the-money call and an out-of-the-money put.
The trade aims to make a profit from a big move of the underlying stock in either direction. A rise in volatility also helps the trade.
Buying a long strangle is cheaper than a buying a long straddle, but will still suffer from time decay. That means the options will lose a little bit of value with each day that passes where the stock doesn’t make a big move.
With a long strangle, the further out in time the trade is placed, the slower the time decay. The downside if you go to far out is the options are more expensive and require more capital.
For Palantir stock, we’ll set up a long strangle using the 80-strike call and a 50-strike put for the Feb. 21 expiration. The call traded around 4.05 and the put around 2.15 this morning.
When we add the two together, the total cost of the trade is 6.20 per share or $620 per contract.
This is a risk-defined trade and the total cost of $620 is also the maximum loss for the trade.
Risks And Rewards
The breakeven prices are calculated by taking the call strike price plus the cost of the strangle and the put strike minus the cost of the strangle.
That gives us breakeven prices of 43.80 and 86.20 for this trade. But that’s at expiration. Profits can happen with a smaller move if the move comes earlier in the trade.
For example, the estimated breakeven prices in mid-December are around 51 and 71.
Changes to implied volatility will have a big impact on this trade and the interim breakeven prices. It’s important to have a solid understanding of volatility before placing a trade like this.
The ideal scenario is a large move in either direction within the first week or two of the trade.
The worst-case scenario with this PLTR long strangle would be a stable stock price. In that case, the call and put slowly lose value each day. For a long strangle I usually set a stop loss at around 20% of capital at risk which would be around $120.
Technically the profit potential is unlimited because of the call option but I still set a profit target of around 40%.
I also wouldn’t hold the trade any longer than late-December. At that point the time decay will start ramping up enough that it will be harder for the price move to overcome that drag.
It’s important to remember that options are risky and investors can lose 100% of their investment.
This article on Palantir stock 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 X/Twitter at @OptiontradinIQ
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