Is Lyft’s Unusually Bearish Options Activity a Warning Sign?

• On paper, ride-sharing specialist Lyft delivered solid numbers for its most recent earnings report.
• However, Wall Street didn’t care for the company’s light guidance for the second quarter, resulting in a steep selloff.
• The options market has lit up with unusually bearish activity, though it’s not absolutely clear what the ultimate trajectory will be.

If investors traded strictly on the hard data, popular ride-sharing platform Lyft Inc (LYFT) should be riding high. Indeed, the company delivered stronger-than-expected results for the first quarter of 2022, accentuated by a revenue posting of $875.6 million, beating the consensus target calling for $845.5 million. The most recent sales tally represented a 44% lift over the year-ago quarter, a clear beneficiary of increased ridership volumes during the COVID-19 bounce back.

Ordinarily, such a robust expansion on a year-over-year basis would represent a cause for celebration. However, LYFT stock tumbled in the afterhours session following the May 3 disclosure, eventually leading to a catastrophic loss of nearly 30% in the following session. What made the volatility even more perplexing was that Lyft posted a third consecutive entry of positive adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) of $54.8 million.

For context, the latest figure was $127.8 million greater than Q1 2021’s haul. In addition, it exceeded the upper end of the ride-sharing firm’s own guidance by approximately $40 million. So, it begs the question, what gives?

While Q1 of this year was encouraging, management softened guidance for Q2 to reflect harsher economic realities, namely surging gasoline prices. The disclosure sent investors rushing for the exits, worried that broader circumstances don’t bode well for businesses exposed to consumer sentiment. If that wasn’t bad enough, unusual options activity for LYFT stock implied more pain to come.

But should investors heed the apparent warning sign? Here’s a deeper look into the circumstances.

Traders Won’t Bite on the Contrarian Opportunity of LYFT Stock

For arguably most market observers, the price chart for a particular equity unit is the natural source to gauge its underlying sentiment. Theoretically, the stock price reflects all publicly available information about the issuing company.

However, sophisticated investors will often look to the options market to understand the motivations of traders. To quickly recap, options are contracts that give stakeholders the right — but not the obligation — to buy or sell the underlying asset at a predetermined price (called the strike price). Because options have expiration dates, their acquisition reflects greater conviction due to the time pressure involved.

What can really tip market observers to a sizable move ahead is unusual options activity or trading volume that exceeds normal patterns for the options contracts in question. For LYFT stock, traders have acquired multiple puts across several strike price points, with most of the contracts expiring by July 15, 2022 or earlier. Since puts give the contract holder the right to sell assets at the strike price, their implications are negative.

That’s not to say that everyone is taking bearish bets against LYFT stock, with at least one trader sensing upside opportunities at the $25 level. But the overwhelming sentiment is negative, suggesting that investors should be careful with the ride-sharing firm.

Possible Evidence for Overdone Bearishness

Although the options market doesn’t have great things to say about Lyft at the present juncture, it doesn’t necessarily mean that the underlying security is doomed for failure. Indeed, some evidence points to the idea that the selloff was overdone.

For instance, in the company’s latest Q1 2022 earnings report, it reported an active rider count of around 17.8 million. While this represents a 5% decrease from Q4 2021’s result, it still is a hearty 32% lift on a YOY basis. In addition, the number of active drivers increased substantially from the year-ago quarter, implying broader interest within the gig worker community to utilize the Lyft platform.

It would seem, then, that analysts focused almost exclusively on the softened Q2 guidance and ignored the positives for LYFT stock. That’s not to say that economic headwinds aren’t problematic for Lyft because they are. However, the company is gaining little from its demonstrated resilience navigating rough waters.

In addition, the concept of revenge travel — or consumers opening their wallets to make up for the lost experiences they incurred during the pandemic-disrupted years — could benefit LYFT stock. It’s also possible that due to higher energy costs and international COVID-19 restrictions that travelers will focus their attention on domestic routes.

If so, that would aid Lyft, which has a smaller footprint than rival Uber Technologies (UBER).

A Perplexing Setup

Although there’s a certain appeal to trading against the grain, when the overwhelming response is toward a specific direction, sometimes being a conformist (rather than a contrarian) may be the best approach. As discussed above, Lyft faces significant challenges to its core business that investors should not dismiss offhand.

At the same time, the one-day loss of 30% for LYFT stock does seem excessive. While recession concerns are rising, consumer demand for “old normal” experiences like vacations are still robust. Therefore, those that have some loose change to spare may wish to consider LYFT for the speculation-earmarked section of their portfolios.