Investment Reflection: Selling a Palantir Cash-Secured Put Option
Overview of the Strategy
On May 21, 2024, I sold a cash secured put option for Palantir Technologies $Palantir Technologies Inc.(PLTR)$
Rationale for the Strategy
1. Current Stock Performance:
At the time of the option sale, Palantir’s stock was priced at $21.28 and the advent of generative AI has pushed stock price up 239% since early last year. This strong performance indicated investor confidence and robust market demand for Palantir's offerings.
2. Financial Health:
Palantir’s financial metrics have shown significant improvement. The company reported consistent year-over-year (YOY) quarterly revenue growth throughout 2023. Additionally, it transitioned from negative to positive EBIT from 2022 to 2023, demonstrating enhanced operational efficiency.
3. Free Cash Flow (FCF) Growth:
A noteworthy factor was Palantir's impressive free cash flow growth, which more than doubled from $131.88 million in Q3 2023 to $296.31 million in Q4 2023. This substantial increase in FCF suggests strong financial health and the ability to generate cash, which is crucial for sustaining growth and development.
4. Strategic Partnerships:
Palantir's recent partnership with Oracle $Oracle(ORCL)$ is another positive indicator. This collaboration aims to leverage AI and cloud-based solutions to enhance business and government operations. Oracle's extensive market reach is expected to expand Palantir's customer base, reinforcing its market position and driving future growth.
Outcome and Reflection
Given the robust financials and positive market sentiment, selling the put option with a strike price of $20 provided a reasonable margin of safety. Here are the potential outcomes and reflections:
1. Stock Stays Above Strike Price:
If Palantir’s stock price remains above $20 until the maturity date on June 21, 2024, the put option will expire worthless. In this scenario, I keep the $40 premium received, which translates to a direct profit. Given the stock’s current price of $21.28 and its growth trajectory, this outcome seems likely.
2. Stock Falls Below Strike Price:
If the stock price falls below $20, I will be obligated to purchase Palantir shares at the strike price of $20. Considering the current price of $21.28, this would allow me to acquire the stock at a discount of approximately 7%. The effective purchase price would be even lower when accounting for the premium received, making it a favorable acquisition price given Palantir’s solid financial position and growth prospects.
Outlook and Insights
Given the positive financial metrics, strategic partnerships, and robust market performance, the decision to sell a cash secured put option on Palantir appears sound. The key insights derived from this strategy are:
- Risk Management: The cash secured put option strategy effectively manages risk by providing a margin of safety and generating income through the premium received.
- Market Sentiment: Palantir’s strong market performance and financial health suggest that the stock is likely to remain above the strike price, minimizing the risk of having to purchase the stock.
- Strategic Acquisition: In the event the stock price drops below $20, acquiring Palantir shares at this discounted price aligns with a long-term investment strategy, given the company’s growth potential and financial stability.
Conclusion
Selling the cash secured put option for Palantir with a strike price of $20 provided a strategic opportunity to potentially acquire the stock at a favorable price or to earn income through the option premium. The decision was based on Palantir’s strong financial performance, significant growth, and promising strategic partnerships. As the maturity date approaches, this strategy remains a prudent approach to investing in Palantir Technologies, leveraging both risk management and market opportunities.
Disclaimer: Investing carries risk. This is not financial advice. The above content should not be regarded as an offer, recommendation, or solicitation on acquiring or disposing of any financial products, any associated discussions, comments, or posts by author or other users should not be considered as such either. It is solely for general information purpose only, which does not consider your own investment objectives, financial situations or needs. TTM assumes no responsibility or warranty for the accuracy and completeness of the information, investors should do their own research and may seek professional advice before investing.
