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BACK IN NOVEMBER, I wrote about using options to bet that shares of Peloton Interactive would decline. This was my first options trade. I purchased the put option when Peloton was trading in the low $50s. The option cost me $200, and it gave me the right to sell 100 shares at $35 per share in March 2022.
Since then, Peloton’s shares have indeed tumbled. It was recently announced that the stock will be booted from the Nasdaq-100 index, the company has continued to struggle with public relations blunders and this morning its shares plunged below $30 (symbol: PTON). While I’m still bearish on the stock, I decided to sell my put last week for $600, giving me a profit of $400 or 200%.
Why? I never thought I’d see much of a gain on the trade. I understood the risk that I could lose the entire $200 premium if Peloton shares finished above $35. And I would have been okay with that loss because I made the trade, in part, to gain first-hand experience.
While I understood the downside, I was less prepared to make a profit. When Peloton shares traded lower after I bought the option, the value of my position quickly doubled to $400. With the continued selloff in January, my position tripled to $600. I felt greedy not accepting a 200% gain.
Another reason for selling last week: I knew the position would likely lose value as the option’s expiration date approached. At this point, the range of possible outcomes remains relatively large, and that bolsters the option’s value.
The final reason I sold: I don’t like rooting for a stock to tank. It felt as if I was hoping for a gymnast to slip off the balance beam. Still, all in all, it was a good—and lucrative—learning experience. But it’s back to indexing for me.
Is there are resource that you can recommend to understand more about options? I’ve always not fully understood how they work on a practical level. Thanks, and nice work.
Hi Ben – I found the following site to be have some good information. Hope it works for you: https://www.investopedia.com/options-basics-tutorial-4583012
Wow. Good move. I don’t understand options well and have never bought any but this was pretty straightforward. Any idea what happens to your gains as far as taxes go? Is it taxed as short-term gains?
I did this trade in my Rollover IRA account, so there are no capital gains. If this would have been in my taxable brokerage account, it would have been treated as a short-term capital gain.