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A Peloton Trade That Risks Less Than Two Month’s Membership

A Peloton Trade That Risks Less Than Two Month’s Membership

Trade summary: A bull call spread in Peloton (Nasdaq: PTON) using the April 17 $30 call option which can be bought for about $1.62 and the April 17 $32 call could be sold for about $0.98. This trade would cost $0.64 to open, or $64 since each contract covers 100 shares of stock.

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  • In this trade, the maximum loss would be equal to the amount spent to open the trade, or $64. The maximum gain is $136 per contract.  That is a potential gain of about 112% based on the amount risked in the trade.

    Now, let’s look at the details…

    The Peloton bike, according to Wirecutter, “is a high-end indoor bicycle rigged with a Wi-Fi–enabled, 22-inch touchscreen tablet that streams live and on-demand classes and allows the rider to compete with other participants (by way of a live leaderboard that ranks riders based on “output,” or the total wattage of energy expended) and get a strenuous cardio workout in the process.

    Until very recently, it was the only game in town, with a devoted following. According to Peloton’s IPO prospectus, the company had 511,000 connected-fitness subscribers in late 2019 and a 95 percent retention rate.

    It has sold more than 550,000 machines—a number that includes its bike and its treadmill, the Tread. The most popular on-demand classes have tens of thousands of rides completed; special live rides have been known to pull in nearly 20,000 live riders at one time.

    The idea, hatched in 2012 and launched in 2014, was to bring the boutique indoor-cycling experience (such as what you can get from SoulCycle and Flywheel) into the home, making it convenient for the likes of time-strapped business people, stay-at-home parents, and far-flung suburbanites to get in a challenging, competitive, high-tech pedaling session whenever they like.

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  • The brand also offers off-the-bike exercise classes, like running, yoga, strength training, and meditation. It all comes with a boutique-fitness-class price tag, with the bike alone costing $2,245 including delivery (minus tax), plus a $39-per-month membership fee for the streaming content and iOS or Android app, obligatory for the first year.”

    The company notes on its web site that consumers can “get the Peloton Bike for as low as $58/mo over 39-months at 0% APR. Based on a full price of $2,245. Plus the cost of a Peloton All-Access Membership ($39/mo).”

    A recent analyst upgrade is attracting attention to the stock.

    PTON daily chart

    The Street noted, “PTON was initiated with a buy rating and $42 price target at Rosenblatt Securities, which sees the subscription exercise company benefiting as the coronavirus forces gyms to close.

    The firm sees the New York home workout equipment and streaming company as a direct beneficiary as gyms close as part of the world’s effort to combat the virus.

    Peloton “is attractively positioned disrupting the fitness industry and an attractive business model benefiting economies of scale and early-mover advantage,” analyst Bernie McTernan wrote.

    The company “should be a beneficiary from Covid-19 in the short term as gyms are closed,” he said.

    The analyst sees potential upside over the medium term as “consumer preferences continue to shift towards working out at home.”

    The price target represents about 50% potential upside from the stock’s [recent levels}.”

    The analyst noted that “Peloton is at the intersection of two fitness trends: delivering the quality of boutique fitness studios like Equinox, while also providing at-home convenience.

    Peloton is still delivering bikes amid the coronavirus outbreak while also bringing in digital subscriptions, though Rosenblatt’s checks have shown that delivery times are increasing. But the firm says that’s a sign that demand for the product and service is greater.”

    The weekly chart shows trading since last year’s initial public offering has been volatile, making it an ideal candidate for options traders.

    PTON weekly chart

    A Specific Trade for PTON

    For PTON, the April 17 options allow a trader to gain exposure to the stock. This trade will be open for about two weeks and allows for traders to turn over capital quickly, potentially compounding gains several times a year.

    An April 17 $30 call option can be bought for about $1.62 and the April 17 $32 call could be sold for about $0.98. This trade would cost $0.64 to open, or $64 since each contract covers 100 shares of stock.

    The amount paid to enter the trade is the largest possible loss on the trade. This is generally true whenever a trader is creating a debit to enter an options trade. “Creating a debit” means there is a cost to enter the trade. You could create a debit by simply buying puts or calls to open a directional trade.

    In this trade, the maximum loss would be equal to the amount spent to open the trade, or $64.

    The maximum gain on the trade is equal to the difference in exercise prices less the amount of the premium paid to open the trade.

    For this trade in PTON the maximum gain is $1.36 ($32- $30= $2; 2 – $0.64 = $1.36). This represents $136 per contract since each contract covers 100 shares.

    Most brokers will require minimum trading capital equal to the risk on the trade, or $64 to open this trade.

    That is a potential gain of about 112% based on the amount risked in the trade. The trade could be closed early if the maximum gain is realized before the options expire.

    A Trade for Short Term Bulls

    As with the ownership of any stock, buying PTON could require a significant amount of capital and exposes the investor to standard risks of owning a stock.

    To reduce the risks of a trade, an investor could purchase a call option. This allows them to benefit from upside moves in the stock while limiting risk to the amount paid for the options. However, buying a call option can also require a significant amount of capital and includes the risk of a 100% loss.

    Whenever an option is bought, the maximum risk is always equal to 100% of the amount of spent to purchase the option. Since options cost significantly less than a stock, the risk in dollar terms will usually be relatively small to own an option.

    To further limit the risks of the trade, an investor could use a bull call spread. This strategy consists of buying one call option and selling another at a higher strike price to help pay for the cost of buying the first call. The spread strategy always reduces the risk of an options trade.

    This strategy is designed to profit from a gain in the underlying stock’s price but PTON the benefit of avoiding the large up-front capital outlay and downside risk of outright stock ownership. The potential risks and rewards of this strategy are summarized in the chart below.

    bull call spread

    Source: The Options Industry Council

    Both the potential profit and loss for the bull call spread are limited. The maximum loss is equal to the net premium paid when the trade is opened. The maximum profit is limited to the difference between the strike prices, less the debit paid to put on the position.

    This strategy could be especially appealing with high priced stocks where the share price and options premiums are often a significant commitment of capital for smaller investors.

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