Barron's - USA (2021-02-15)

February 15, 2021 BARRON’S M5

THE STRIKING PRICE

The options market is basically telegraphing

that it is hard to figure out the trajectory of

Palantir’s stock.It’s a little ironic.

How to Play Palantir’s

Extremely Volatile Options

I

f you like volatility, you will lovePal-

antir Technologies.

The big-data analytics company has

options volatilities that often exceed

134%, making them among the most richly

priced options in the entire market.

Implied volatility is a key determinant of

options premiums. When it is high—as is

the case with Palantir (ticker: PLTR)—it

means the options market is pricing a stock

as very likely to make a sharp, strong move,

up or down. When implied volatility is high,

especially compared with the S&P 500 in-

dex, many investors like to sell options.

Why? They get paid a lot for doing so.

By giving Palantir’s puts and calls such

an extraordinarily high volatility, the options

market is basically telegraphing that it is

hard to figure out Palantir’s stock trajectory.

It’s a little ironic.

Palantir is the digital equivalent of a Big

Brother who watches everything and finds

patterns in huge data sets. The options mar-

ket analyzes the stock market in similar

ways. Yet it is essentially struggling to con-

textualize Palantir, which went public on

Sept. 30 through a direct listing on the New

York Stock Exchange.

At these levels, Palantir’s options indicate

the stock may move about 8.4% on any given

day—but it’s hard to get any directional indi-

cations from put and call volatility.

Skew, which measures the difference

between put and call implied volatility, is

used to gauge directional bias in the options

market. Palantir’s skew is flat, which means

there is no bullish or bearish bias that is

readily evident in the options because the

implied volatility of puts and calls are at

similar levels.

Investors generally have some sense, or

bias, about the direction of stocks, so the flat

skew is something of an anomaly.

Part of the reason may be that Palantir’s

trading volumes are congregated in the first

few weeks of the options expiration cycles.

The heavy focus on near-term trading indi-

cates that investors aren’t willing to take a

chance on what happens to Palantir for

more than a month.

This tentativeness is provocative for any-

one who thinks that Palantir is well-situ-

ated to profit off the digitization of the

world, and especially the needs of govern-

ment and the private sector to sort and ana-

lyze data. A cursory review of Palantir re-

veals the company’s services are much in

demand, especially among the U.S. govern-

ment and major corporations.

Aggressive investors might consider a

“short strangle” trade—that is, selling a put

and a call with a higher strike price but a

similar expiration—paired with the pur-

chase of Palantir stock. The options strategy

expresses a willingness to own Palantir

stock at lower prices and to sell it at higher

prices, along with a desire to take advantage

of the extraordinary implied volatility levels

in the options market.

The implied volatility of the S&P 500 is

about 17%, so Palantir’s options are trading

at a huge premium to the broad market.

Many seasoned options investors like to sell

high-volatility options because it means that

the options premium, or prices received for

contracts, is similarly high.

With Palantir stock at $31.91, aggressive

investors can buy the stock, sell the March

$27 put for $2.28, and sell the March $36

call for $4.40. If the stock falls to $27, inves-

tors are obligated to buy it at the put strike

price, or cover or roll the put to avoid as-

signment. Should Palantir’s stock be at $36

or higher at expiration, investors would sell

the stock.

The strategy is suitable only for someone

who believes in Palantir’s business and is

willing to add to the stock position on weak-

ness, and doesn’t mind selling stock after a

14% advance. The sale of the stock at the call

strike price represents a quick, aggressive

trade. The trade covers Palantir’s release of

fourth-quarter earnings on Feb. 16.

Palantir stock has ranged from $8.90 to

$45 since the company’s IPO. The stock is

up 36% so far this year.B

By Steven M. Sears

Equity Options

CBOE VOLATILITY INDEX

VIX Close VIX Futures

10

30

50

70

90

MAMJ J ASOND JF

Daily Values Source: CBOE

THE EQUITY-ONLY PUT-CALL RATIO

Put-Call Ratio S&P 500 Index

30

55

80

105

130

155

180

205

230

255

280

305

330

MAMJ J ASOND JF

Source: McMillan Analysis Corp.

SPX SKEW

Implied volatility %

8

9

10

11

12

13

14

15

16%

MAMJ J ASOND JF

Source: Credit Suisse Equity Derivatives Strategy

NDX SKEW

Implied volatility %

7

8

9

10

11

12

13

14

15

16%

MAMJ J ASOND JF

Source: Credit Suisse Equity Derivatives Strategy

Skew indicates whether the options market expects a stock-market advance or decline. It measures the difference

between the implied volatility of puts and calls that are 10% out of the money and expire in three months. Higher

readings are bearish.

Week'sMostActive

Company Symbol TotVol Calls Puts AvgTotVol IV%ile Ratio

Denison Mines DNN 590351 586701 3650 4040 100 146.1

Energy Transfer KT 18492 17692 800 236 99 78.4

RCM Technologies RCMT^96033703590026898 35.8

Rekor Systems REKR 192190 130327 61863 6708 90 28.7

Ring Energy REI 223579 215056 8523 7868 98 28.4

Arcadia Biosciences RKDA^690356333157043500100 19.7

ION Geophysical IO^117621166210066898 17.6

Opera Ltd. OPRA 4738 4520 218 312 94 15.2

Mesa Air MESA 18582 16478 2104 1260 51 14.7

FSD Pharma HUGE^1424921182162427611020100 12.9

Rockwell Medical RMTI 17157 15410 1747 1380 82 12.4

Comstock Resources CRK 60867 59382 1485 5040 98 12.1

Yiren Digital YRD^1695016409541146099 11.6

Protalix Bio Therapeutics PLX 13538 12003 1535 1208 92 11.2

KalVista Pharmaceuticals KALV 60263 18639 41624 5808 15 10.4

Evoke Pharma EVOK^2483924030809254898 9.7

Bsquare BSQR 57209 31100 26109 5968 97 9.6

Yellow YELL 67695 60039 7656 7044 82 9.6

Hanesbrands HBI 101973 68440 33533 11268 44 9.0

AC Immune ACIU^1120383882815131298 8.5

Thistableofthemostactiveoptionsthisweek,ascomparedtoaverageweeklyactivity–notjustrawvolume.Theideaisthatthe

unusuallyheavytradingintheseoptionsmightbeapredictorofcorporateactivity–takeovers,earningssurprises,earningspre-

announcements,biotechFDAhearingsordrugtrialresultannouncements,andsoforth.Dividendarbitragehasbeeneliminated.In

short,thislistattemptstoidentifywhereheavyspeculationistakingplace. Theseoptionsarelikelytobeexpensiveincomparisonto

theirusualpricinglevels.Furthermore,manyofthesesituationsmayberumor-driven.Mostrumorsdonotprovetobetrue,soone

shouldbeawareoftheseincreasedrisksiftradinginthesenames

RatioistheTotVoldividedbyAvgTotVol.IV%ileishowexpensivetheoptionsareonascalefrom0to100.

Source:McMillanAnalysis