As earnings season approaches the midway point, and following the Federal Reserve’s announcement of a 25-basis point interest rate hike last week, the market continued its ascent. For the week the S&P 500 gained 1%, the Dow rose by 0.65% and the Nasdaq added 2%.
This week we are adding to the portfolio a volatile stock with earnings coming soon. And because of those risks we are going to sell an in-the-money covered call which will give the trade some room.
The Stock – Palantir (PLTR)
Why the Strength
Most of the action in AI stocks so far has been (for good reason) driven by the picks-and-shovels players (like Nvidia), knowing there will be massive investment in the sector. But what about the platforms themselves? Many figure it will be commoditized (free or nearly free to use), but it’s unlikely big players (including defense-related government sectors) will hook their massive data sets into just any old AI platform—not only will functionality be key, but so too will security, not just from outside but making sure the platform itself only accesses whatever data it should.
That’s the big idea with Palantir, which has been working on some form of its AI architecture for years, so much so that Q2 already saw it release an initial version (one for businesses, one for defense outfits; Ukraine is using Palantir’s software for targeting and damage assessments) of its comprehensive platform to select customers, allowing them to deploy new language models on their own data sets with specific instructions that can produce not just answers but who or what systems to then hand off tasks to. (In the Q1 call, in fact, management said it deployed a pre-release version to an insurer who, within a few days, was able to automate its claims processing!)
Management was hyper-bullish on that same Q1 call, basically saying they will be the platform of choice going forward and that it was receiving hundreds of inquiries—though the issue is that this is all theoretical for the moment, with Palantir’s core software business doing fine but not exactly producing rip-roaring growth. But investors are obviously looking ahead—the Q2 report is due a week from today, with all eyes on any traction its platform is generating.
Technical Analysis
PLTR came public in 2020, topped out in 2021 and then crashed into the single digits; it didn’t hit a nadir until earlier this year and then spent months bottoming out. But when the AI buying frenzy started, PLTR kicked into gear—and in a big, big way, with the stock exploding higher on six straight weeks of monstrous volume. From there, the stock had some downs and ups, which served as a rest period until late last week when it began to take off again. Volatility is extreme here on both the upside and downside. Stop — 14.8
The Covered Call Trade
Buy Palantir (PLTR) Stock at 20, Sell to Open September 18 Strike Calls (exp. 9/15) for $3, or a Net Price of 17 or less
Static Return: $100 per covered call (5.88%)
Breakeven: 17
Covered Call Return (if assigned): $100 per covered call (5.88%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 17 or less. (In this case 20 minus 3 = 17. Or another example is you could pay 19.80 for the stock and sell the call for 2.80, which also equals 17)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
If our stop is hit, I will send an alert giving detailed instructions on how to exit the trade. But don’t get too worried about setting the stop. I will manage that for you.
The next Cabot Profit Booster issue will be published on August 8, 2023.
