Income

Palantir Stock: Covered Calls for Income (NYSE: PLTR)

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Reader engagement is one of the most rewarding aspects of writing on Seeking Alpha. Satisfaction peaks when readers say they learned from the article, ask more questions, and even suggest topics for the next article. The first two stocks profiled in the Covered Call series were AT&T (T) and Microsoft (MSFT).

With reader feedback and questions in mind, we choose Palantir Technologies (NYSE: PLTR) as next stock.

Why Palantir?

  • When talking about income, stocks like Palantir don’t come to mind. The usual suspects like AT&T or Altria Group (MO) do. One of the main purposes of this article is to show that covered calls can be used to earn your own income from any stock in the market, even a non-dividend paying and volatile stock like Palantir.
  • Thinking about the next stock to write about in this series, we were considering more volatile (and reasonably known) since the first two stocks covered are generally considered safe and have a beta of less than 1. Therefore, Tesla (TSLA) was our first candidate. However, as some readers pointed out in the comments section of Microsoft’s article, not everyone has 100 Microsoft shares at $300 per share idle in their portfolio for covered calls. This argument threw Tesla out the window. Palantir fits the bill in all three categories: 1) well known at this point. (2) more volatile (3) At $11 it is much easier for an investor to consider the buy-write strategy described below as well as to already hold at least 100 shares to be able to sell a covered call.
  • Speaking of volatility, this has a direct impact on the Palantir options premium. Readers may recall AT&T and Microsoft articles that choosing a strike price 10% above the current market price earned a premium of about 1% for selling a covered call. which expired approximately one month after the day the contract was sold. Note the options chain for Palantir below and the premium is consistently higher than those of AT&T and Microsoft for any strike price (in terms of % from current trading price) on any date of expiry.
  • Buy write: We own AT&T and Microsoft stock and therefore did not need to “buy” the stock when considering it for covered calls. We don’t own Palantir and this gives us the opportunity to explain to readers what a “buy-write” is. With the stock trading at a lower price** of $11, an investor can buy 100 shares for $1,100 and immediately write a covered call to sell it at a future expiration date at a price you like. To summarize, in a buy-write scenario, you are
    • Buy at least 100 shares of a stock you like at market price (or limit price).
    • Set a date when you want to sell the same stock.
    • Set a price at which you want to sell.
    • Receive a premium (income) for it.
  • ** Please note that we are fully aware and also warn readers that the displayed price of a stock does not make it expensive or cheap on a fundamental basis. However, for a covered call, you need at least 100 shares. That’s why an $11 Palantir is much more attractive than, say, an $800 Tesla.

PLTR stock option chain

PLTR (Think or Swim) option chain

For this exercise, we choose the exercise price of $13.50. Let’s look at the returns and possible scenarios.

  • If Palantir remains flat or below $13.50: the premium of 28 cents per share represents a 2.54% return on the underlying stock price of $11. That’s more than double the returns we’ve seen in AT&T and Microsoft articles. Just to reiterate the stark difference between Palantir and the other two stocks profiled so far, the premium yield is 2.54% versus 1% or less in the previous two examples. This is despite Palantir’s strike price being 22% higher than the 10% used in the other two articles. Wow! This clearly shows the impact of volatility.
  • If Palantir exceeds $13.50: the writer of the covered call will be forced to forfeit the shares in this case. That might not be too bad considering that Palantir is currently trading at $11 and selling at $13.50 represents a return of 22.72% in one month. Adding the 2.54% bonus, that’s more than a 25% return. The total return in this scenario is $13.50 + $0.28 – $11 = $2.78 per share or a good 25%. For comparison, for a fairly similarly dated options chain (one month), AT&T and Microsoft’s returns were around 10%.
  • What if Palantir takes off? : As you might have already guessed, it’s a much higher probability with Palantir than with stocks like AT&T and Microsoft. Palantir can indeed blow up on any hint of good news and that could make the 25% yield pale above in comparison. However, since the company has just reported its earnings, the chances of a sudden increase are lower but still much higher than the typical covered call stock.

Palantir stock outlook

We haven’t covered Palantir from a fundamental perspective so far and that’s not really the intent of this article either. Other Seeking Alpha contributors have done this as seen here. However, we would like to highlight a few things that caught our attention about the stock and the company.

  • Basically, still overvalued: Although it has fallen around 70% from its all-time highs and is trading at 52-week lows, the stock is still expensive at 54 times forward earnings and 22 times earnings/ sales. The only consolation is the fact that these numbers were N/A (no revenue) and around 70 respectively just a few months ago.
  • Cash: For a company that’s been publicly traded for just over a year, Palantir’s cash flow and debt-free status are surprisingly strong. Cash is about 10% of the company’s current market capitalization and the fact that such a young company has no debt highlights its cash flow, which has seen impressive growth, as this article highlights. .
  • Business insights: The future (and even the present) is all about data. Customer data. Friends data. Data on enemies. Competitor data. With the liability of data processing comes the costly and risky aspect of security. Palantir dealt almost exclusively with government entities in its early days and therefore knows the name of the game better than its competition.

Things to know – Appendix

Keeping in mind the length of each article, we will seek to add just three key takeaways from the comment sections of previous articles.

  • IRA vs. Taxable Account: This question has come up many times in recent articles. Currently we use the IRA for covered calls and therefore premium earnings are tax deferred. A word of warning for readers here: don’t let the tail wag the dog. Paying taxes shouldn’t be the only reason preventing you from executing covered calls (or any strategy) if you can only do so in a taxable account.
  • Expires weekly instead of monthly: Some readers have pointed out that they make weekly calls instead of the monthly calls we use in our examples. It’s a good strategy as long as you have the discipline and the weekly time allotted to execute it. It’s easy to see why some find this advantageous: there are 52 weeks versus 12 months per year, even though the weekly premiums are lower than the monthly premiums. In short, more than one way to skin a cat.
  • What if my stocks skyrocket and I don’t want to sell/lose my stocks? : This may require an article on its own, as there are several ways to handle this situation. But in summary, (A) roll the option on a future date chain (B) close the position by “buying to close” if the stock is near but not yet above your strike price (C) consider writing put options at a lower strike price just in case you are worried about losing stock but still want to hold the stock in the future.

Conclusion

Well, writing that was fun. It is interesting to explore different types of stocks for this series and present the results to our readers. It gets a bit difficult to sift through all the comments and decide which ones to address, but there’s always an upcoming post!

Please note that this article is not so much about buying Palantir as it is about using Palantir as an example. As far as we know, it could indeed turn out to be a great stock in the long run, but with all the macro worries, the stock may not have seen its worst even at $11. So, prepare for a wild ride if you already own the stock or decide to follow the buy-write strategy outlined in this article. In the meantime, we ask readers to continue the wonderful discussions of covered calls and options and submit more questions and ideas.