Palantir’s (PLTR) stock has surged over 274% this year and is now trading above $60. As the stock continues its remarkable run, investors are looking for ways to profit from a potential big move. A long strangle trade can be an effective way to achieve this, but it requires careful setup and risk management.
Palantir’s stellar ratings make it an attractive candidate for options trading. With a Composite Rating of 99 and EPS Rating of 97, the stock is ranked No. 1 in its industry group according to IBD Stock Checkup. This strong performance has sparked interest in breakout trades, such as long strangles.
A long strangle is constructed by buying an out-of-the-money call option and a put option with a strike price above the stock’s current price. The trade aims to profit from a big move in either direction, which can be particularly effective when volatility rises. However, this type of trade also involves time decay, where options lose value over time.
For Palantir, we’ll set up a long strangle using an 80-strike call and a 50-strike put with a February 21 expiration date. The total cost of the trade is $620 per share or contract, which is also the maximum loss for this risk-defined trade.
The breakeven prices are calculated by adding the call strike price to the strangle cost and subtracting the put strike price from the strangle cost. For this trade, the breakeven prices are around 43.80 and 86.20 at expiration. However, profits can occur with smaller moves if the move happens earlier in the trade.
Changes in implied volatility will significantly impact this trade, so it’s essential to have a solid understanding of volatility before placing a trade like this. The ideal scenario is a large move within the first week or two of the trade. If not achieved, the worst-case scenario would be a stable stock price, causing the call and put options to lose value over time.
To mitigate this risk, a stop loss can be set around 20% of capital at risk. A profit target of around 40% is also recommended. However, investors should keep in mind that options trading carries significant risks, including the potential for losses exceeding 100% of the investment. This article is intended for educational purposes only and not as a trade recommendation. Investors are advised to consult their financial advisor before making any investment decisions.
Source: https://www.investors.com/research/options/palantir-stock-long-strangle-profit-big-move