Palantir Technologies has experienced a significant rally this year, gaining over 65% since late June, pushing its stock price above $180. However, two critical indicators suggest a moment of caution for investors: the stock’s 14-day Relative Strength Index (RSI) is nearing overbought territory, and surprisingly, the cost of downside protection via put options is near a 52-week low. This unusual combination implies that while euphoria drives the stock higher, prudent investors might consider hedging their gains with affordable put options or put spreads.
Palantir Technologies (PLTR) has been a standout performer this year, captivating momentum traders with its impressive ascent. The stock has surged by more than 65% since its low on June 25, even adding another 3.5% on a recent Friday to trade above $180. While the run has been remarkable, two critical numbers, when considered together, strongly suggest that it’s time for current holders and opportunistic traders alike to seriously evaluate strategies for protecting their gains.
The first number indicates that Palantir's stock price is considerably stretched. The 14-day Relative Strength Index (RSI), a widely watched momentum indicator, registered 69.50 at midday on Friday. Given that a reading above 70 is generally considered 'overbought' territory, Palantir is now right on the doorstep of signaling excessive buying pressure. While RSI isn't a precise timing tool (strong stocks can remain overbought for extended periods), it’s a powerful gauge of how much positive news and optimism is already factored into the share price. Following Palantir's aggressive rally, it’s clear that a substantial amount of good news is already reflected in its current valuation.
The second number is arguably even more compelling. Our proprietary PutDex index, which tracks the normalized price of a 30-day Palantir put option (specifically one standard deviation below the stock price), is currently in the bottom decile of its 52-week range. In simpler terms, this means that the very same put options that institutional investors typically acquire for insurance against a significant market downturn are trading at some of their cheapest levels over the past year. This phenomenon is occurring even as Palantir’s stock trades near its annual highs.
This combination of an extended stock price and unusually cheap downside protection is highly atypical. Normally, when a stock experiences such a sharp upward movement, buyers flock to protect their burgeoning gains, causing the price of downside insurance to firm up. With Palantir, however, the opposite is happening. Traders appear so engrossed in chasing further upside that comparable out-of-the-money call options are actually more expensive than their equivalent puts. This imbalance is a hallmark of extremely frothy equities, where fear among long positions is minimal – and it’s precisely at such moments that insurance becomes most valuable.
Consider a practical example of a protective trade: With Palantir shares trading at $180.85 on a recent Friday midday, a September 25 expiration $170 put option, with approximately five weeks until expiry, could be purchased for $5.90 per contract (or $590 for 100 shares). This represents the maximum risk for the position. The trade would become profitable if PLTR falls below $164.10 at expiration, which is roughly 9.2% below the current price. For a stock known to move 5% or more in a single day based on headlines, such a pullback is far from improbable.
For traders looking to reduce the upfront cost, a put spread offers an attractive alternative. By purchasing the same September 25 $170 put and simultaneously selling the $155 put against it, the net outlay is cut to approximately $3.60 per contract ($360 for 100 shares). While the short strike caps the maximum potential profit at $11.40 (the $15 difference between the strikes minus the net premium paid), this maximum profit is realized if shares fall below $155 at option expiration. Thus, a put spread would risk $3.60 to potentially make $11.40.
This strategy isn't a prediction that Palantir shares are destined to collapse. Instead, it’s a calculated move based on the observation that a stock priced for perfection, with momentum indicators signaling overbought conditions, is inherently vulnerable to an ordinary market pullback. Furthermore, the options market, seemingly distracted by the aggressive pursuit of upside, appears to be mispricing this very real possibility. Long-term stockholders can view the put as an affordable form of insurance on their accumulated gains, while traders can utilize the spread as a defined-risk method to counter the prevailing euphoria. In either scenario, when the market presents cheap insurance for a stock that is this extended, the astute decision is often to defy conventional wisdom and embrace protection.
