• While tech wildness presents a contrarian opportunity in Palantir Technologies, the calculus is complex.

• Traders can structure their transactions in PLTR stock call spreads in a manageable, binary format.

Thanks to the technology sector struggling badly on Wednesday — with a political matter dragging down Nvidia Corp. — big data analytics specialist Palantir Technologies Inc unfortunately fell in sympathy with its peers. In theory, PLTR stock now offers contrarians a possibly discounted upside prospect. At the same time, the vagaries of the current market cycle warrant consideration of smart, risk-mitigated strategies.

Specifically, the tech juggernauts felt the heat as the U.S. government announced that it would bar Nvidia from selling its H20 chips to China. This decision could wipe out an estimated $5.5 billion from the company’s projected quarterly revenue. Further, the implications affected other chipmakers, such as Advanced Micro Devices Inc., which is exposed under the new licensing requirements.

Because the headwinds are not directly tied to Palantir's core business offerings, a temptation exists to go long on PLTR stock. While this may be a rational form of speculation, it's not without serious risks. With diplomatic tensions rising between the U.S. and China, the impact of an all-out trade war would likely create a ripple effect globally. That's not necessarily good news for Palantir or any other tech entity.

Stated differently, traders may have a general idea of where the market may head next, at least in the near term. With such a strong downturn on Wednesday, it's possible — perhaps likely — that PLTR stock will attempt to build back up over the next few days. But the magnitude of this buildup (if it materializes) represents a major question mark and that brings the discussion to parallax compression.

PLTR Stock And The Concept Of Parallax Compression

In the field of optical systems, parallax error refers to the visual distortion between perceived alignment and actual alignment (or lack thereof). For example, when firing a rifle from a distance, a slight shift in eye position can create an illusion where the reticle or crosshairs appears to move relative to the target. Parallax error, without correction, can lead to a missed shot.

Similarly, parallax error in the options market can lead to an outright loss. In most options-based transactions, traders must wrestle with a three-dimensional problem: direction, magnitude and time. Simply stated, where to, how far and when?

Frustratingly, a trader can be correct in the direction and time component but failure in magnitude can still implode the position. This process is aggravating by design because the field of math involved is stochastic calculus, a brutally difficult field due to the concept of randomness over time.

Fortunately, traders can compress the parallax in the options market by structuring transactions in such a manner where the magnitude component of the equation is effectively nullified. In other words, traders will frame the problem at hand as one involving direction and time. That's a pre-algebra equation that anyone can perform.

Think of it this way. When facing multiple attackers, the fighting art of Krav Maga (and other systems) recommends avoiding confrontations between threats on opposing planes. Instead, one should line the threats one behind the other. Of course, this positioning doesn't eliminate the number of attackers, but it flattens the battlefield where the opponent loses an advantage and the person being attacked has a more manageable crisis.

While not nearly as dramatic (hopefully), parallax compression in the options market operates under the same principle.

Compression Into Action

Let's look at a real-world example to bring the above concept to life. At the moment, PLTR stock is attempting to stabilize around the $90 level. Assuming it can achieve said stabilization, this level could represent an ideal launching point for a quick-fire bullish trade.

Statistically, PLTR stock demonstrates an upward bias. A position entered at the beginning of the week has a 55.3% chance of rising by the end of the week. The prior week's modest momentum doesn't appear to materially impact the aforementioned upward bias. Thus, it's reasonable speculation to go long here.

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One idea that stands out is the 88/90 bull call spread for the options chain expiring April 25. This transaction involves buying the $88 call (at a time-of-writing ask of $575) and simultaneously selling the $90 call (at a bid of $450), resulting in a net debit paid of $125, the most that can be lost in the trade.

Should PLTR stock rise through the $90 short strike price at expiration, the trader collects the maximum reward, which is $75, a payout of 60%. And that's where the parallax compression is. The trader doesn't have to worry about how far up PLTR goes, just as long as it moves up (or stays where it is at $90).

With most other debit call spreads, the stock in question may need to rise by a not-insignificant magnitude to achieve profitability. With the 88/90 bull spread — assuming a market price of $90 — this parallax error is accounted for.