After a stock has a massive, market-shaking move, it’s not uncommon for traders to start looking for the next XYZ stock.
We saw it with Tesla (TSLA) going into the market peak in 2021 as the stock had returned more than 13,000% for early investors.
Similarly, traders have had their antennae up for the next Netflix (NFLX) as that stock is up 86,000% since its IPO (back when it was just competing with Blockbuster and well before it was a streaming juggernaut).
And these days, investors are hoping to replicate the performance of Nvidia (NVDA). Nvidia is up 1,100% since the bull market began in October 2022 and the stock has been a Wall Street darling.
So, many traders are now focused on finding the next NVDA, and I think there is a chance that Palantir (PLTR) could fit that bill. Here is why …
PLTR stock exploded higher by approximately 23% following the release of its earnings report in the first week of February. The short version of why the stock reacted so well to earnings is that PLTR is in the perfect spot for the potential AI revolution. My fellow Cabot Analyst Mike Cintolo summarized it well when he previously summarized the stock for his Cabot Top Ten Trader subscribers:
Palantir has seemed perfectly positioned for the AI boom ... The company’s history as a provider of advanced software and analytical/security platforms for government entities (especially U.S. and friendly militaries) means it’s been leveraging various forms of AI and machine learning for years, putting it way ahead of others when it comes to developing a platform that can be mass adopted not just by governments, but by big companies looking to dramatically streamline operations.
In Q4, EPS rose 75%, driven by a 64% jump in U.S. commercial revenue and a 45% increase in U.S. government revenue.
Palantir also guided to FY 2025 revenue of $3.75 billion, ahead of analyst expectations of $3.5 billion.
And while the company story and potential are impressive, of much greater interest to me is the wild call buying activity on the day after earnings. Here is a small sample of this bullish option activity from February 4:
Buyer of 1,500 PLTR July 125 Calls for $11.50 – Stock at 105
Buyer of 1,100 PLTR March 80 Calls for $27 – Stock at 105
Buyer of 3,000 PLTR May 150 Calls for $3.70 – Stock at 102
Buyer of 1,000 PLTR September 125 Calls for $14 – Stock at 102
There have been plenty more call buying trades in the days since, but I think you get the point … options traders are expecting the stock to move higher.
And in fact, what makes this call buying interesting, outside of the big premiums spent, is that this call buying could create a self-fulfilling prophecy of sorts for the stock to move higher. This is what I mean:
Back in the day when I was an options market maker on the floor of the Chicago Board of Options Exchange (CBOE), when a broker came into my crowd and bought calls, I would sell him those calls and then immediately buy stock to hedge off that call sale.
If I sold 10 calls, I might buy 500 shares to hedge. If I sold 2,000 calls, I might buy 10,000 shares … it really depended on which calls I was selling. This was simple hedging.
Now, as we got closer to expiration, if those 2,000 calls I sold were likely to finish in the money I would have to buy more and more stock as it became more and more likely that I would be short stock on expiration via the exercise of those 2,000 calls.
So how are we seeing this in PLTR?
The call buying in PLTR is off the charts in terms of size. And every time a trader buys 1,000 calls, or 2,000 calls, or any number of calls, the market maker who sold those calls has to buy stock, which pushes the stock higher.
As the stock moves higher the likelihood of those calls that were sold finishing in the money increases, and the market maker then has to buy more and more stock. It almost becomes a self-fulfilling prophecy pushing the stock higher.
I bring this up to highlight that as we continue to see WILD call buying, the likelihood of PLTR stock moving higher will continue to improve … though as always with any stock, and especially in the highly controversial AI investing world, only time will tell whether PLTR is the next NVDA, or just another overhyped bubble stock. Should be interesting!
