Not too long ago Palantir (NYSE:PLTR) burst onto Wall Street through a SPAC. In its short public life span PLTR stock quickly became a favorite of mine to trade. The long term thesis for this is to simply own it. I’ve had success buying the dips and chasing the technical breakout opportunities.
While the stock is new to traders, the company itself has been around since 2004. They are already up and running with a great line of products. This is far better than most of the EV SPACs whose stocks are high on hope and nothing else. The fundamentals for Palantir are already on track so it makes for a great bullish bet.
For the active traders, PLTR stock is a buy on every significant dip. The investors can ignore the short term gyrations since they have a longer horizon for it.
After watching their management presentations I quickly became a fan. I am not alone, so the team has earned the benefit of the doubt among most experts. They have a successful commercial and government business segments. They empower users to make decisions on the fly, so they’d be better at what they do.
Anyone who has run a company knows how hard it is to consolidate data sources for strategic use. The solutions that Palantir offers make that process efficient and productive. I can safely assume that if the stock markets are higher in the future, then so is PLTR stock. The method by which investors can participate to the upside can vary.
The traditional way is to own shares. This brings up the question as to when to start buying them. Sadly there isn’t one perfect answer. Doing it in tranches makes total sense. Buying some now as it falls into $31 per share is sensible in the long run. Adding to that if it falls another $10 from here is also valid.
PLTR Stock Has Momentum
So far PLTR has proven itself very fast. In January I laid out the upside trajectory to $30 per share on a chart. It delivered and then some, as PLTR spiked and topped $45 less than a month later.
Momentum stocks like these are difficult to time. Case in point, look back a few days and you’ll see how it rallied $13 in just a few hours. Mind you that was perhaps because it got wrapped up in the mess that r/WallStreetBets created. After the GameStop (NYSE:GME) fiasco, pundits circulated lists of stocks ripe for a short squeeze. Palantir stock made the list and launched.
Unfortunately it gave it all back up but not all is lost. From a trading perspective, revisiting the neckline from which you broke out is totally normal. The near term problem here is that it could easily revert to a lower level of contention at $28 per share. Buying some now and adding later would be the sane course of action. I like to use options specifically for companies like this. I believe in it long term, so I don’t mind getting assigned shares at lower levels.
Therefore I can confidently sell puts to generate income without any out-of-pocket expenses. In fact I receive credits for the opportunity to buy shares at a much lower price. If PLTR doesn’t fall then I miss out on buying it. I would have created profits without any expenses.
Selling puts works best on bad days. When a stock is falling fast the put premiums explode higher. It makes sense to sell them to those who are panicking trying to buy insurance too late. Add to it that the CBOE Volatility Index (VIX) is still at extremely high levels, and that proposition gets even more attractive.
What I don’t do is create this exposure without wanting to own the shares. If an investor cannot or does not want to own shares they should sell put spreads instead.
Risk Can Come from All Directions
There is also the concern that I have that comes from the overall market. Stocks have gone way too far given the Geo economic conditions. I know it feels like everything is hunky-dory because Wall Street is breaking records every week. But ask yourself this: If things were so great, then why are governments panicking? The U.S. just poured another $2 trillion of stimulus into its economy. That’s something that is done when the economy is in shambles.
Here’s the easy way to think about it. In January 2020 we had solid employment levels and good economic conditions. This year we have millions unemployed, terrible economic conditions, and the virus is still killing more people than ever. It makes no sense for stocks now to be folds higher than the pre-pandemic idyllic conditions. The S&P, NASDAQ and small-caps are 14%, 35% and 25% respectively above the February 2020 tops.
I don’t mean to cause alarm, but am rather raising concerns. I don’t have reason to short markets outright, but I should be cautious. For example, instead of taking full size positions in a stock, I should nibble. This would leave me room to manage the risk if things go south in the next couple of months.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.
