Easily one of the standout performers this year, big-data analytics specialist Palantir Technologies (PLTR) has gained almost 400% of market value since the beginning of January. However, it can also be argued that since early December, PLTR stock has entered a sideways consolidation pattern. With the possibility looming of either a breakout or a breakdown, investors may want to consider a directionally neutral options trade called the long strangle.
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Given its stratospheric performance and supporting fundamental catalysts, I am currently net bullish on PLTR stock. Previously, I had concerns about the underlying enterprise. Still, the tape cannot be denied. Thanks to the blistering run of artificial intelligence, more enterprises and institutions have been inking deals with Palantir. And that’s part of the reason why top analysts are pounding the table on PLTR.
At the same time, it’s possible to have too much of a good thing too quickly, which may result in an eventual correction. Take a look at Nvidia (NVDA) as an example. Since the start of 2024, NVDA has gained almost 200%, which is ridiculously good. However, in the past six months, the performance sits at a more pedestrian 14% up. If a correction impacts PLTR stock, you’ll want to have protection for this possibility.
The Straightforward Nature of the Long Strangle
As one of the easiest multi-leg options strategies, the long strangle is both simple and effective. The concept involves buying a call option for a certain options chain (i.e. expiration date) and simultaneously buying a put option at a lower strike. With this structure, the trader is able to attack two outcomes: either a big swing higher or a sharp drop lower. The long strangle is powerful if you’re not confident in direction but rather in the magnitude of movement.
Now, let’s get the bad news out of the way first. Primarily, long strangles are expensive because you’re paying a premium for the call side and the put side. Ordinarily, the breakeven point for a purchased option is the strike price plus the premium. However, since you’re paying for two premiums, the breakeven point for both outcomes is significantly extended. Secondly, the target security must move adequately, or else both options will expire worthless.
Still, what makes the long strangle attractive is that it’s a limited-risk, unlimited-reward opportunity. The amount of money in danger is limited to the total debit paid for both the call and the put. However, there’s no upside ceiling for how high a stock can climb. On the put side, the stock could fall to zero. So, while at least one option will definitely expire worthless, you can ride the profitable option all the way to expiration (if you dare).
Getting the Lay of the Land for PLTR Stock
On the surface, what makes PLTR stock attractive as a long strangle options play is the underlying volatility. Right now, PLTR features a 60-month beta of 2.7, meaning that it’s significantly more wild than the benchmark equities index. So, chances are, the security will move strongly, irrespective of the direction. That said, you must also be aware that the options market often prices in this volatility with higher premiums.
Still, the main reason why PLTR stock is so attractive as a long strangle is the current consolidation pattern that it finds itself in. After seemingly hitting new plateaus on a daily basis, the security encountered relative upside resistance this month. Nevertheless, the latest price action suggests that PLTR has regained its bullish momentum. Therefore, it’s realistic to assume that the equity may continue rising.
However, the expert consensus view is very much split. Late last month, Jefferies sounded the alarm, explaining the possibility of PLTR stock dropping to $28 per share. In part, analysts at the research firm noted that the last time high magnitudes of multiple expansion occurred was during the COVID-19 bubble. Therefore, it may be prudent to at least cover the possibility of a significant drop. A well-placed long strangle would do just that.
One Trade to Keep on Your Radar
Anytime you’re dealing with options strategies, you must consider the multivariate nature of risk. In particular, you must not only factor in the amount of money in danger (the total debit paid to enter the trade) but also the likelihood of success. Generally speaking, trades that feature higher probabilities of profit will carry more positional risk (i.e., a higher debit requirement).
Understanding this point, the way the market is structured presently, investors may want to consider the 90C/80P long strangle for the options chain expiring Jan. 24, 2025. Buying the $90 call represents a very bullish bet that PLTR stock will swing decisively higher from its current consolidation pattern. Still, the purchase of the $80 put may be profitable if the bears decide to spoil the party (which could easily happen).
Of course, one of the risks is that PLTR stock swings higher, then falls lower, leading to a small net movement by expiration. This is where the long strangle — and its close cousin the long straddle — can be tricky. If you have already achieved an adequate profit, you may want to consider exiting the position early to secure your gains.
Wall Street’s Take on Palantir Technologies
Turning to Wall Street, PLTR stock has a Hold consensus rating based on two Buys, seven Holds, and four Sell ratings. The average PLTR price target is $42.20, implying 47.70% downside risk.
The Takeaway: Bet on PLTR Stock’s Volatility Rather Than its Direction
Although no one will deny that Palantir Technologies represents one of this year’s strongest performers due to the AI surge, it’s also fair to point out that PLTR stock could be due for an eventual correction. Other tech giants have witnessed a strong first half of 2024, only to fade considerably in the second half. Astute investors may prepare for this possibility with a long strangle options strategy.
With the long strangle, traders aren’t betting on a direction but rather the magnitude of movement. So long as the target security swings (or breaks down) adequately enough, the trader can collect profits from the one profitable option, whichever it may be. However, stasis is the enemy of the long strangle. So, should profits be achieved, it may be wise to consider exiting the position early.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
