Betting Against

Kyle McIntosh

I’M USUALLY BORING when it comes to investing. My portfolio is mostly comprised of stock and bond index funds. I dabble in individual stocks when I come across something I see as interesting, but individual stocks have never made up more than 5% of my portfolio. I currently hold just three individual stocks amounting to less than 2% of my investment holdings.

While my interest is occasionally piqued by stocks with upside potential, I’m more often drawn to companies I see as having significant downside. This glass-half-empty orientation likely reflects the professional skepticism that comes with being a CPA. I’ve never acted on my bearish instincts—until now. Recent developments at Peloton Interactive (symbol: PTON) have led me to wager that the stock will continue declining.

I’ve followed Peloton closely for years. I love its product. But a series of management missteps have caused me—and many others—to become bearish on the stock. The company’s troubles have included bungling a product recall and unexpectedly bad financial performance. The last straw for me: Peloton recently raised $1 billion through a stock sale—just two weeks after the company’s chief financial officer indicated such an infusion of capital was unnecessary.

To act on my bearishness, I decided that buying a put option was the most prudent approach. Unlike shorting a stock—which has an unlimited downside if shares rise—a put option limits my possible loss to the premium I pay for the put. After considering the array of options available, I paid $200 for a put that gives me the right to sell 100 shares of Peloton at a “strike price” of $35 a share in April 2022.

There’s a wide range of possible outcomes for this option position, but I’ll give two possibilities. If the stock trades above $35 in April 2022—which is likely, given that the shares have lately been trading in the low-to-mid $40s—my loss will be the amount of the premium. If the stock trades below $33, however, I stand to make a profit.

For instance, if the shares trade at $30 in April 2022, I’ll earn a $300 profit. How so? I’d make $500 by exercising the put and selling 100 shares at the $35 strike price, equal to $3,500—shares for which I’d only need to pay $30 each, or $3,000 total. That $500 gain would be partly offset by the $200 premium I paid for the put.

If I don’t like holding this option over the next few months, I can sell it at the market price, just as I could any stock holding. Yes, this is a small investment. But I’m a person who learns by doing. The worst that can happen: I’ll have paid $200 to get an education in options trading.

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Luckless Pedestrian
Luckless Pedestrian
1 year ago

You don’t indicate whether or not you currently own shares of PTON. As you know, the implications of buying puts on stocks you own versus buying puts on stock you don’t currently own are quite different. Perhaps you could clarify.

1 year ago

As LP said, if you actually owned PTON you have other option (no pun intended) such as selling a covered call.

Kyle Mcintosh
Kyle Mcintosh
1 year ago
Reply to  corrupt

Thanks for the comments. I do not hold any PTON shares, so this is not a hedge against a long position. I purchased the option when the shares were in the low-$50 range. So far, I am a little ahead on the $200 investment, but I am still pretty far out of the money.

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