Options Corner: Why Palantir Could Be The Ultimate FOMO Stock

It's probably the biggest question in the equities market right now: where will shares of Palantir Technologies Inc. PLTR head next? For many investors, the answer is down — perhaps way down. Following a blistering earnings performance that led to a catapulting of PLTR stock, it's natural to assume that market gravity will eventually have its say. However, the empirical data presents a counterintuitive framework.

On the surface, skepticism is arguably more than warranted. Yes, Palantir's fourth-quarter earnings print was outstanding. Adjusted earnings per share landed at 14 cents, while revenue hit $827.52 million, beating analysts' consensus estimates of 11 cents and $775.91 million, respectively. Notably, the top line in total jumped 36% on a year-over-year basis, with sales tied to government contracts in particular rising 45% year-over-year to $343 million.

However, the issue is whether such results can be sustained. Investors that read between the lines will surely have taken note of the Cathie Wood-led Ark Invest, which made significant trades involving several high-profile securities, PLTR stock included. Specifically, the ARK Innovation ETF ARKK recently offloaded 5,495 shares of PLTR, potentially indicating that the equity is priced for perfection.

Still, not every expert agrees with abandoning ship. BofA Securities analyst Mariana Perez Mora reiterated a Buy rating while also lifting the price target from $90 to $125. In the expert's words, "2024 was only a dress rehearsal." Looking ahead, Palantir "sees the world ripe for an AI and technology revolution."

Also Read: Block In The S&P500? BofA Analyst Says Company Meets All Criteria

‘FOMO' Fuels the Remarkable Rally of PLTR Stock

As a rule of thumb, what goes up in the market tends to at least cool off — it's part of the normal ebb and flow of price discovery. However, certain securities tend to respond to greed more than others, driven by the fear of missing out or FOMO. And that's perhaps the best way to describe PLTR, as a FOMO stock.

Since its market debut, PLTR's pricing data viewed stochastically — that is, devoid of any other context aside from the temporal — demonstrates an upward bias. A position entered at the beginning of the week has a 55.51% chance of rising by the end of it. Over a four-week period, the long odds dip only slightly to 53.57%.

However, investors are only human and are subject to responding more acutely to extreme aberrations in the fear-greed spectrum. Unless something truly wild happens, PLTR stock is on pace to post a weekly return of over 30% by Friday's close. Notably, whenever PLTR posted a double-digit-percentage gain over a one-week period (an extreme-greed event), the odds that the subsequent week will rise popped to 60.71%.

Even better, on a four-week basis, long odds following an extreme-greed event soar to 65.38%. What's more remarkable, long odds regarding a four-week run following a one-week gain of 20% or greater clock in at 80%. For 30% or greater, PLTR stock is actually on a perfect record.

To be sure, as the statistical parameters tighten, the dataset becomes nominally smaller, risking distortions. Nevertheless, the trend shows that FOMO fuels PLTR stock — but there is one catch.

Under the positive outcome, median returns four weeks following a double-digit weekly pop only come in at 7.83% up. From a purely stochastic view, PLTR stock would normally generate (under the positive scenario) a median return of 15.33% over a four-week period. Therefore, the magnitude of bullishness does fade over time.

Identifying a Sensible Trading Idea

Given the previously mentioned market intelligence, investors may consider a more conservative upside price target. While the crowd may have the psychologically satisfying $120 price level as the go-to milestone, a more realistic proposition would be somewhere in the neighborhood of $116.

Indeed, it might not even be a bad idea to assume that PLTR stock might only reach $114 four weeks from now. That would be a modest lift, assuming that shares close at around $108 this Friday. However, with the leverage of options — specifically a multi-leg strategy called the bull call spread — speculators can potentially enjoy outsized rewards.

For example, a trader may consider the 107/114 bull spread for the options chain expiring March 7. This transaction involves buying the $107 call and simultaneously selling the $114 call. The credit received from the sale of the short call partially offsets the debit paid for the long call, thereby discounting the net long position.

Bull spreads are capped-reward, capped-loss transactions, meaning that, in this case, there are no additional rewards if PLTR stock rises above the $114 short-strike price. However, the risk of choosing a short strike that is too high is that the underlying security might never reach the breakeven threshold.

Ultimately, bull spreads with a $114 short leg (or within close proximity of this strike price) arguably offer a sensible approach given PLTR's unique FOMO sensibilities.

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