Covered Calls For Income: Palantir Again

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Things to know - Appended

Keeping the length of each article in mind, we will be looking at adding just three key learnings from the comments sections of the previous articles.

1. Best time to write covered calls? When the stock is up. AKA the green days. On green days, the stock is closer to any strike price on your covered call, no matter the strike price and the expiration date. You have higher risk of getting called away and hence the higher premium. The options chain shown below proves this point. For the same length of time (March 25th expiration last week vs. April 1st expiration right now), the premiums are consistently higher for every strike price. For example, the $13.50 strike price we picked in the previous article offered a 2.54% premium vs 3.13% right now. If the stock is generally range bound or if the macro conditions make you believe (as they do now) that green days will likely be followed by red days in equal measure, writing covered calls on green days makes even more sense.This is exactly the opposite for those interested in selling puts to acquire a stock down the road. Sell puts on red days to net higher premiums.

2. If you are arguing that the stock you are writing covered calls on could go down, then you are missing the point of covered calls entirely. None of our articles argued that Covered calls totally protected you from the downside on your underlying stock. Everyone knows any stock "can" go down to $0. Covered calls offer a cushion by providing you a premium to wait for higher prices.

3. Whatto do with falling stocks?

• Lower your cost basis: As one readercommentedon the previous Palantir article, if you really believe in the stock, consider using the premium to buy more shares of the same stock. Using the Palantir chain below ($13.50 strike price), for every 100 shares you hold, the premium netted gives you enough cash to buy 3 shares at much lower prices to bring your overall average down. Again, this is only if you believe the stock will turn around.
• Rinse and Repeat: If your covered call expires without getting called, you can continue selling more covered calls to add to your cash holding.
• Sell: The last and simplest but hardest to implement suggestion? Sell any stock you don't believe in. Strategies like covered calls and selling puts have one underlying premise: that you believe in and like the underlying stock. These strategies augment your income and/or offer a price at which you'd like to sell/buy. But they do not form thebasisof your investment thesis.

Now that we've established the best time to write covered calls and what it offers and doesn't, let us look at the returns and possible scenarios for this sample Palantir chain (strike price $13.50 expiring on April 1st, 2022).

• If Palantir remains flat or below $13.50: The premium of 36 cents per share represents a return of 3.13% on the underlying share price of $11.47, which again underscores the high volatility of this stock plus the fact that premiums tend to up high on/after green days.
• If Palantir goes above $13.50: The covered call writer will be forced to give up the shares in this case. This may not be too bad considering that Palantir is currently trading at $11.47 and selling at $13.50 represents a 17.69% return in a month. Adding the 3.13% for the premium, that's ~ 21% return. The total return in this scenario is $13.50 + $0.36 - $11.47 = $2.39 per share or a healthy 20.83%. The overall return is lower than the one in the previous Palantir article and that is attributed to the share price going up about 4% meantime.
• What if Palantir blasts off? Palantir as a stock is highly volatile as we've established already. But the currentmacro-economic conditions make it likely that we will see back and forth days, resulting in stocks generally being range bound. If you do not want to risk your entire stock holding getting called away, you may consider selling covered calls only on partial position. For example, if you hold 500 shares of Palantir, sell covered calls on, say 200 or 300 so you don't risk getting called away on all 500 shares.

Outlook for Palantir's Stock - Recent events

• Turnaround time? Cathie Wood's ARK Innovation ETF (ARKK) has dumped 30 Million shares in the last two weeks or so as Seeking Alpha has coveredhere. When a large fund keeps dumping at that pace, the stock hasnowhere to go but down. The good news is that the end of these events usually offer a breather for the stock and may signal a bottom. Additionally, as contrarians, we believe the worst is behind a stock when the biggest bull has thrown in the towel.
• The company is further strengthening its position as a secure provider for government agencies, as Seeking Alpha has coveredhere. With the unfortunate situation in Ukraine, it will not be a surprise if many other countries and government agencies start spending more on cybersecurity and data analytics/intelligence. As we wrote in our previous article, Palantir started out dealing exclusively with governments.Hereis another of their recent wins in the Government space.
• The stock may (very likely in our opinion) still go lower in one final flush down the toilet, either by itself or with the rest of the market. With the easy money behind us thanks to the Fed (on both directions), only the fittest will survive. The stock may still appear overvalued but its fundamentals with a strong position, zero debt, and an early mover advantage, a buying opportunity in the single digits will be too hard for us to let go. We may finally buy the stock in that range after selling puts profitably in the past.

Conclusion

Covered calls offer a cushion but not full protection. Covered calls are also not to be confused with selling puts (as many readers did with the "naked puts" and "falling knife" analogies in the previous article). If you are down heavily in Palantir but believe in the company long term, consider selling covered calls to accelerate yourbreak-even point.

Speaking of Palantir in particular, the best time to buy is when the biggest bull has thrown in the towel. The best time to sell is when the last bear has thrown in the towel. ARKK dumping Palantir may just be the catalyst the stock needs for a turnaround.

Source:Seeking Alpha

$Palantir Technologies Inc.(PLTR)$