Unusual Options Activity for Peloton (PTON) Seems Incredibly Risky

One of the biggest winners during the first year of the COVID-19 pandemic, Peloton Interactive (PTON) – which gained popularity for its in-home exercise bikes – attracted significant demand due to fortuitous dynamics. Essentially, with government agencies mandating quarantines and restrictions on personal mobility, PTON stock skyrocketed because of underlying positive health implications. However, as pandemic fears faded, the upside narrative diminished sharply.

Indeed, diminished sharply represents a diplomatic take. On a year-to-date basis, PTON stock hemorrhaged nearly 78% of equity value. What’s worse, the downfall has been largely unmitigated. While a few pops here and there materialized briefly, the bearish trajectory is nothing short of relentless. Even in the trailing five days, shares plunged over 15%.

Despite this awful backdrop, some brave (arguably reckless) contrarians bid up PTON stock in the options arena. In some respects, though, the narrative connects to a sensible thesis. According to ResearchAndMarkets.com, “Self-care is becoming a vital part of people health amid COVID-19, including mental, physical, and emotional health.” Even with the fading of the crisis, “increased awareness regarding health and fitness is expected to significantly drive the home fitness equipment market growth.”

Therefore, it’s not impossible for PTON stock to rise higher based on relevant fundamentals. However, it might be imprudent to invest heavily in Peloton based on a flawed interpretation of underlying probabilities.

As Barchart.com content partner The Motley Fool mentioned, “In fiscal 2022 (ended June 30), Peloton lost a whopping $2.8 billion primarily because sales took a nosedive. After generating over $4 billion in revenue during fiscal 2021, the company was expecting further growth in fiscal 2022, which never happened. Instead, its revenue sank by 11% to $3.5 billion.”

This is a troubled company. Yet some folks believe PTON stock may offer potential upside.

PTON Stock Raises Major Eyebrows

Following the conclusion of the Oct. 17 session, PTON stock became one of the glaring subjects of unusual options activity. Specifically, bullish contrarians targeted the $8.50 calls with an expiration date of Oct. 21, 2022 – this coming Friday.

Volume for the trade reached 34,287 contracts against an open interest reading of 1,469. Moreover, the bid-ask spread as represented by the midpoint price (17 cents) came out to 5.88%. Given the time to expiry, it’s arguably a fairly wide spread. Usually, market makers give themselves a healthy safety margin for transactions that are difficult to place.

It’s also worth pointing out that PTON stock features a beta of 1.5, indicative of higher-than-average volatility. For the record, Peloton shares closed at $7.75 on Monday, meaning that shares must rise 9.68% within a matter of days for the trade to be at the money.

Interestingly, though, the speculatively bullish take on PTON stock aligns with the current dominant trend in the options market. According to data from Barchart.com, Peloton at the moment features a put/call open interest ratio of 0.37. The delineation point between bullish and bearish sentiment is 0.70, with figures lower than this threshold indicating bullish sentiment (more people are buying calls than puts).

What’s more startling, PTON stock enjoys an overall bullish assessment from Wall Street. Currently, out of 23 analysts, 12 rate shares a “strong buy” while one gives it a “moderate buy.” Only two analysts rate Peloton as a “strong sell.” The remaining eight analysts have the in-home exercise bike manufacturer as a “hold.”

Warring Fundamentals Cloud Peloton’s Narrative

Despite significant market losses, as stated earlier, PTON stock isn’t without its bullish arguments. Fundamentally, the underlying company may benefit from a sociological pivot, one that takes personal wellness much more seriously than in prior pre-pandemic paradigms.

In addition, the unique forces undergirding the COVID-19 crisis resulted in a professional boon for many workers. Therefore, as another report from ResearchAndMarkets.com pointed out, the combination of interest in healthier lifestyles and increased disposable income may undergird PTON stock and similar exercise-related investments.

Again, it’s not a fantastical argument. However, with soaring inflation taking a bite out of the dollar’s purchasing power, many customers that were on the fence about exercise bikes may simply opt for a cheaper alternative: acquire a smartwatch or fitness tracker, buy some athletic apparel (which is probably on discount) and exercise outdoors.

As social dynamics such as revenge travel confirmed, people suffered from a bad case of cabin fever due to COVID-19. Thus, in a very real sense, the cheaper alternative may be the more attractive one.

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