Shares of Peloton plummeted over 18% in Thursday's trading as the company reported poor fiscal year-end results. The battered exercise-bicycle maker reported a loss of $3.76 per share.
This marked the sixth straight quarter of losses. Revenue of $678.7 million also missed analyst expectations of $718.2 million and represented a 28% decline from a year prior.
With the poor news already out and options continuing to display heightened volatility, investors can use a short strangle to take advantage of rangebound trading in Peloton stock.
A short strangle is an options strategy where an investor takes no view of the up or down direction of shares on inception. Instead, the trader believes shares will move less either way than the market is anticipating.
With Peloton stock trading around 10.30 Friday, investors can consider placing a short strangle by selling the 10.50 call and 10 put on the Oct. 7 expiry. This trade can be placed for a credit of $2.65 per share, which also coincides with the maximum gain of $265 if the shares trade between $10-$10.50 on expiration.
An investor will earn a profit if Peloton is trading between $7.35-$13.15 on expiration. In the event of a large move, the loss is theoretically uncapped. Investors should manage this risk by only taking a small position and either hedging with shares or closing the trade if more than the maximum loss for an individual position is reached.
Implied Volatility Over 100% Appears High Without Catalysts
Oct. 7's options currently have an implied volatility of 103%, which implies daily moves of around 6.5%. While this is in line with realized volatility over the past year, Peloton has had a tumultuous year. The company replaced its CEO and embarked on a massive cost-cutting strategy.
While there certainly remains a lot of uncertainty around Peloton stock, the October options do not have any exposure to company earnings. Additionally, with the company lowering its current-quarter guidance Thursday, a lot of the bad information may already be priced in. These factors could result in lower volatility and rangebound trading over the next two months, making the short strangle an attractive trade.
Peloton stock is down over 70% year to date and has IBD's lowest Composite Rating of 1. Shares are trading at the 50-day moving average but below the 200-day line.
