Palantir (PLTR) stock’s phenomenal run looks like it’s getting a bit long in the tooth. Options flow has been negative over the last week as the stock has pulled back more than 6% in three days.
Analysts are also unconvinced about the stock, with only two buy ratings, eight hold ratings, two moderate sell ratings and five strong sell ratings.
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What Is A Bear Call Spread?
With the stock under pressure, I’m willing to bet that it will trade sideways at best over the next few weeks.
Today, I’m looking at a bear call spread that assumes Palantir will struggle to get above the 85 level, which is right around the all-time high.
Building Bear Call Spread
A bear call spread involves selling an out-of-the-money call and buying a further out-of-the-money call.
The strategy can be profitable if the stock trades lower, sideways, and even if it trades slightly higher, as long as it stays below the short call at expiry.
A Feb. 21 expiry bear call spread on Palantir using the 85-90 strike prices can be sold for around $1.40.
Traders selling the spread would receive $140 in option premium, which is also the maximum gain. The maximum loss would be $360.
That represents a potential return of 39% between now and Feb. 21.
Max Profit At This Palantir Stock Level
The spread will achieve the maximum profit if Palantir stock closes below 85 on Feb. 21. In that case the entire spread would expire worthless, allowing the trader to keep the $140 option premium.
The maximum loss will occur if Palantir closes above 85 on Feb. 21, which would see the premium seller lose $360 on the trade.
While some option trades have the risk of unlimited losses, a bear call spread is a risk-defined strategy, and you always know the worst-case scenario in advance.
A stop loss could be set if Palantir trades above 85, or if the spread value rises from $1.40 to $2.80.
Because this is a bearish position, traders who think Palantir could move higher from here should not enter this trade. The position starts with a delta of -8, meaning it is roughly equivalent to being short eight shares of Palantir.
Palantir No. 1 In Its Group
A bear call spread can also act as a small hedge for long stock holders.
According to IBD Stock Checkup, Palantir ranks No. 1 in its industry group. It has a Composite Rating of 99, an EPS Rating of 97 and a Relative Strength Rating of 99.
The last bear call spread we looked at, on Tesla (TSLA) Dec. 19, has worked perfectly and can be closed.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ
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