PLTR is getting hit on earnings, after completing a full roundtrip of the most recent push to 45. The stock is an institutional darling… and I think it will continue to be.
We can use this “liquidation hangover” as an opportunity to get net long the stock and collect a good premium in the name.
Breaking Down Earnings
The stock took down an 0.08 loss against a 0.02 expected. That’s normal for these kinds of names, where they will burn through cash to grow. I wouldn’t worry too much about those fundamentals.
Rev growth was 40%, and that was a beat. Overall it is still looking good for the name. Investors panicking over a bottom line number are probably ignoring the fact that if they keep growing like this, they can easily get to profitability.
Here’s The “Buy the News” Event
After a stock IPOs, there is usually a lockup period for shares so you don’t have too many stakeholders selling at the same time.
Today is the first day that all shares are available to sell.
The “obvious” risk is that, now that all these shares are available to sell, that will lead to selloffs.
That’s not how the real world works. What I’ve found is that stocks tend to bottom into the lockup date. It’s a “sell the rumor, buy the news” kind of event.
First thing I want to point your attention to is the blue line– that’s the Volume Weighted Average Price (VWAP) from the IPO date, and the stock is almost there. I expect clear institutional buying to come in around that level.
Combine that with the key support levels that the stock built out from Nov-Jan timeframe. This will be a retest of the lower end of the trading range, where… again… I expect buyers to show up.
I think that the buyers from the past month are stuck on the back foot, and the past 3 days are a liquidation of those weak hands, and the well-capitalized participants will start showing up here soon.
The Options Board
What I want you to pay attention to is the implied volatility (IV) on the March options– that is what we will focus on for now.
In a normal options board, you will see IV rise at lower strikes, that’s because investors are willing to pay up more on a relative basis for crash protection.
What we have been seeing recently in these “hangover” trades is that there is a downside kink in the IV, where a disproportiante number of participants are willing to sell into.
We want to be part of those, and that’s why I’m focusing on the 20 strike.
This is a fairly straightforward bet, we are expecting that the downside risk is not as great as what the options are pricing in, and as the stock attempts to find 20, that large buyers will start showing up.
I could easily be early, so I want to add to the trade at a higher price if and when the stock comes down into 23.58.
This is something I’m willing to be assigned on. I think I’ll do well if I can buy PLTR with a basis of around 19.90, and then I can convert the trade to covered calls.
There are some other cool things we can do– rolling the puts to April and May if we are still confident on the levels in the trade.
On a cash basis, a .91 credit against 19.09 is 4.77% return. We’ve got about a month out, so this is about 57% annualized.
If you want to avoid the margin risk, then you can buy the 16 put against the trade for .23.