Palantir Stock Offers Opportunity for Short-Put Traders 

Palantir Technologies Inc. NYSE:PLTR

Palantir Technologies (NYSE:PLTR) stock has maintained its position in the mid-$20s following its Q4 earnings release on Feb. 5. Its put option premiums are currently elevated, offering yields of up to 2.2% for options expiring in 3 weeks. This presents an attractive opportunity for existing shareholders looking to hold onto PLTR stock while generating additional income.

At a recent point, the put option was out-of-the-money (OTM) by over 5.8%, considering PLTR stock’s value at $24.96. The premium received for this put option was 67 cents, resulting in a put yield of 2.85%. However, as PLTR closed at $24.18 on March 22, the put option expired without any obligation for the short put investor to purchase the stock.

Currently, with PLTR trading at $24.66, it appears prudent to consider rolling over this trade once more. Before doing so, it’s essential to review why this strategy remains viable. Although previously discussed in a GuruFocus article, a summary of why the stock appears undervalued follows.

Palantir Stock Valuation

In 2023, Palantir generated $731 million in adjusted free cash flow (FCF) from $2.23 billion in revenue, reflecting a notable 33% FCF margin. Analyst projections suggest that revenue could increase to $2.71 billion this year and $3.23 billion next year, potentially resulting in a run-rate revenue of $2.97 billion within the next 12 months.

Applying a 33% FCF margin to this run rate revenue suggests an adjusted FCF of approximately $1 billion, which could support a higher valuation for PLTR stock. For instance, a 1.333% FCF yield implies a market capitalization of $75 billion in the next 12 months.

Shorting OTM Puts for Income

Considering the current market conditions, the April 12 expiration put option chain indicates that the $24.00 strike price puts are trading at 65 cents per contract, offering an immediate yield of 2.708%. Alternatively, the $23.50 strike price puts, trading at 47 cents per contract, present a yield of 2.0%, albeit with slightly lower risk due to being further OTM.

Moreover, opting for the $23.00 strike price puts, priced at 33 cents per contract, offers a yield of 1.43% with even lower risk. Given the likelihood of PLTR maintaining its current price or possibly rising, shorting OTM puts presents an effective way for existing shareholders to generate pseudo income while waiting for the stock to appreciate, especially considering its absence of dividend payouts.

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