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Palantir (NYSE:PLTR) is gearing up for its second earnings report as a public company next Tuesday morning. With only one previous announcement under its belt, historians don’t have much to base expectations on. Fortunately, the PLTR stock options market provides some clues if you know what to look for.
Source: Sundry Photography / Shutterstock.com
Today we’ll break down expectations and suggest how bulls and bears can position themselves into the announcement.
Let’s start with a few comments on volatility. Ever since Palantir broke away from its post-IPO trading range, it’s been a mainstay on the momentum traders’ watchlist. The explosive upside and large candle size are exactly what these gunslingers thrive on.
Ironically, the one earnings report we’ve seen that might provide insight into Palantir’s personality was a nothing burger. After a tiny gap higher, prices stumbled, quickly closing the window.
We’ve seen far more movement outside earnings season. Indeed, PLTR stock boasts an average true range (ATR) of $3.54. Compared to the underlying price of $33.11, that translates into typical daily moves of 10.7%. It’s piping hot enough as is. I’m not sure the imminent announcement warrants that much more caution than a usual day.
The problem, of course, with relying on the ATR indicator is that its backward-looking. For a clearer picture of market expectations for Tuesday’s event, we need to look at option values. The contracts that expire on Feb. 19 reflect the forecasted range for next week’s price movement, which obviously includes earnings. Thursday’s closing price of $33.11 tells us we should look at the $33 strike straddle to gauge expectations. At $6.43, the bi-directional strategy is baking in a move of 19%. That places the higher breakeven at $39.43 and the lower breakeven at $26.57.
In the accompanying price chart, I’ve labeled both breakevens. If we remain inside the range, it means volatility sellers won or that options were overpriced. Alternatively, if we push outside the range, volatility buyers won and that options were underpriced.
I don’t think it’s an easy call either way. What it does confirm, however, is that premiums are generally expensive and that spreads are a smarter way for swinging a trade into earnings than buying options outright.
PLTR Stock Chart
Source: The thinkorswim® platform from TD Ameritrade
As for the price action, we’re seeing some mixed signals, which add to the difficulty of making a directional wager. On the ledger’s bullish side, prices are rising above both the 50-day and 20-day moving averages. Perhaps the strongest signal this year was the epic breakout at the end of January. The groundswell in volume lent credibility to the breach and has me favoring the long side, regardless of this week’s misstep.
With the past two down days, we officially have an equal pivot high. This is the misstep. If the uptrend were going to continue unabated, we would have blasted through the previous peak ($39.50). But, alas, we didn’t. In situations like this, I’m usually waiting for a breakout before buying. Dips following a failed break don’t possess the same allure as those following successful breakouts. Couple that with the plethora of bullish charts out there, and it makes it tough to get overly excited about getting aggressively long ahead of next week’s earnings.
That means either watch the event from afar and wait for a post-news pattern to pull you in, or sell the high implied volatility with out-of-the-money spreads. My preference is to lean bullish if for no other reason than the market has not been rewarding bears at all.
The Trade: Sell the March $25/$20 bull put for $1.10.
The max gain is $110 per contract, and the max loss is $390. Consider this a bet that PLTR stock will remain above $25.
On the date of publication, Tyler Craig did not have (either directly or indirectly) any positions in the securities mentioned in this article.
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