Palantir Earnings Play: Profiting from Volatility with a Naked Put

Selling put options before a company's earnings announcement can be a valid strategy for options traders seeking to capitalize on higher than normal volatility.

One of the primary reasons traders may consider selling a Palantir Technologies (PLTR) put option before their earnings announcement on Friday is the elevated implied volatility. Earnings reports can trigger significant price movements, and this volatility results in an increase in option premiums. By selling the put option before the announcement, traders aim to capitalize on the inflated premium, especially if they believe that the stock will remain above the strike price by the option's expiration date.

Before delving into the strategy, let's quickly recap what it means to sell a put option. 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 be assigned and acquire the stock below the current price.

Selling put options is an easy place for investors to start with options. They are like a covered call and are pretty easy to understand once you know the basics.

Traders selling puts should understand that they may be assigned 100 shares at the strike price.

Potential Benefits

Selling put options allows traders to collect premium income upfront. If the options expire worthless, the seller keeps the entire premium as profit.

The premium received can lower the breakeven point for the trade. If the stock price drops but remains above the breakeven point, the seller still profits.

Traders who are bullish or neutral on PLTR can benefit from the increased volatility leading up to the earnings report.

After the earnings announcement, implied volatility tends to drop significantly, reducing option premiums. By selling options before the announcement, traders can take advantage of this implied volatility drop.

Potential Risks

If the stock price falls below the put option's strike price, the seller may be obligated to buy PLTR shares at a higher price than the current market value.

While the profit potential is limited to the premium received, losses can theoretically be unlimited if the stock price drops significantly.

An earnings surprises could result in a sharp drop in the price of PLTR stock.

Selling a PLTR Put Option Before Earnings

A trader selling the August 7th $110-strike put on PLTR would receive around $240 into their account, which would be theirs to keep. Due to the bid-ask spread, the actual amount could be slightly higher than this.

If PLTR falls below $110 by August 7, they would be required to buy 100 shares at $110. The effective net cost of the position would be $107.60, thanks to the option premium received.

That is 12.52% below Wednesday’s closing price.

If the stock stays above $110 at expiry, the put expires worthless, leaving the trader with a 2.2% annualized return on capital at risk.

That works out to be 90.5% annualized.

This table shows other potential put selling candidates on Palantir Technologies for the July 10 expiration.

On the Palantir Technologies volatility charts, we can see the term structure shows that implied volatility is very high for the expiration immediately after earnings.

This 60% volatility means high option premiums when compared to longer-term options which only have volatility of around 40%.

Company Details

The Barchart Technical Opinion rating is a 100% Sell with a Average short term outlook on maintaining the current direction.

Long term indicators fully support a continuation of the trend.

Palantir Technologies Inc. builds and deploys software platforms for the intelligence community principally in the United States. Palantir Technologies Inc. is based in Denver, Colorado.

Of the 29 analysts covering Palantir Technologies, 20 have a Strong Buy, 7 have a Hold rating, 1 as a Moderate Sell rating and 1 has a Strong Sell rating.

Conclusion

Selling a Palantir Technologies put option before their earnings announcement is a strategy that can potentially generate income while taking advantage of heightened volatility. However, it's essential to understand the risks involved, including the possibility of assignment and unlimited losses. 

Conservative investors may consider buying a further out-of-the-money put to reduce the risk and capital requirements.

This essentially turns the trade into a bull put spread.

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.