Peloton Grows Sales: Are Its Unusually Active Options Worth Exploring?

Happy Friday, everyone. We’ve almost made it to the weekend. 

I originally wanted to talk about special situations stocks today. It's not nearly as easy as one would think to come up with two or three names worth discussing, so I pivoted to Peloton (PTON), a very convenient topic given its 35% jump in Thursday trading.

The big news for Peloton was that it eked out a 0.2% increase in its fourth-quarter sales, providing investors with a glimmer of hope that the once high-flying sporting goods company’s turnaround was gaining traction. 

I have followed the fitness equipment market for many years—primarily because of my love of sports, not because I necessarily think it will make you rich—and have seen many businesses come and go.

At one point (January 2021), Peloton was valued at nearly $50 billion, but now, despite yesterday's big jump, it’s a penny stock. 

While Peloton isn’t what you would call a special situations stock, its unusually active options were busy in yesterday’s trading, with a volume of 545,233, more than 10x its 30-day average.   

It had 19 calls and puts with unusual options activity yesterday—defined as a Vol/OI ratio of 1.24 or higher and options expiring in seven days or more—with very bullish Put/Call Volume and Put/Call OI ratios of 0.33 and 0.35, respectively. 

Somebody thinks Peloton’s options are worth exploring. I’ll consider the pros and cons of diving into this speculative play. 

Have an excellent weekend.

I’m Generally Not a Fan of Penny Stocks

The only penny stock that I can remember showing enthusiasm for over the years is Sirius XM Holdings (SIRI), the satellite radio company and, of course, the home of Howard Stern. After that, except for some Latin American and European stocks, the cupboard is pretty bare. 

Add to this my general disdain for publicly traded fitness equipment companies that talk hyperbolically about their products, and I am very allergic to betting on or even writing about these stocks.

However, I’ve learned that options are perfect when used judiciously for betting on the recovery or collapse of a particular stock. Options allow you to make tiny bets, in effect dipping your toes in the water, to more cost-effectively bet on a down-and-out business ready for a turnaround. 

I guess Peloton fits into this category. 

According to Barchart data, of the 20 analysts covering Peloton stock, only three rate it a Buy. Most (15) sit on the fence with a Hold rating (3.15 out of 5) and a target price of $5.03, more than 10% higher than where it was trading in Friday’s pre-market activity.  

It will take at least a couple more quarters of positive sales growth for the 15 to get off the fence and recommend to their clients to buy Peloton stock.

The Financial Picture Remains Murky

While the company reported a 0.2% increase in sales in the fourth quarter to $644 million, its full-year revenue was $2.70 billion, 3.6% less than in fiscal 2023 (June year-end). It expects 2025 to be another year of declining revenue.   

“Our full year FY25 guidance reflects the expectation that hardware sales will decline Y/Y, as well as an expectation that Average Net Monthly Paid Connected Fitness Churn will continue to increase modestly Y/Y and follow our historical seasonal pattern,” stated its Q4 2024 shareholder letter. 

Overall, it expects total revenue to decline by 9% at the midpoint of its guidance to $2.40 billion, with a 3% decline in paid app subscriptions (595,000) and a 9% drop in paid connected fitness subscriptions (2.72 million). 

In May, it announced it would cut 15% of its workforce as part of a restructuring that would generate $200 million in annual cost savings. It also cut its marketing spending by 19% in the latest quarter. 

As a result, its operating losses for 2024 were $529 million, down from $1.20 billion a year earlier. At the same time, its gross margin in Q4 2024 was 48.5%, 17.2 percentage points higher than a year earlier, and 540 basis points better than in Q3 2024. 

The better margins led to a second consecutive quarter with positive free cash flow -- $26 million, up 135% over a year ago and 202% better than the third quarter. It expects that this will continue to rise in future quarters. 

These last two paragraphs drove the 35% gain in its share price. 

Can it continue? 

With $2.08 billion in total debt—a high 1.23x its current market cap of $1.69 billion—it can’t afford to continue losing money for much longer. According to S&P Global Market Intelligence, its Altman Z-Score is -1.97, which suggests it’s very likely to enter bankruptcy proceedings in the next 24 months, barring a major recovery in profits.

It is a penny stock for a reason. 

The Unusually Active Options

As I said in the introduction, 19 were unusually active on Thursday, with five puts and 14 calls. Two had Vol/OI ratios of 10 or greater. I’ll focus my attention on these.

They both are compelling speculative bets. 

The Jan. 17/2025 $9 call had a closing ask price of $0.30 on Thursday, a 3.3% down payment on 100 shares of Peloton stock. The call expires in 149 days; there is plenty of time for PTON stock to get to $9. Further, for every $1 gain in its share price, the option jumps by 23 cents or 77%. You can double your money by selling your call before expiration if PTON appreciates by $1.30 (29%). Seeing as it did that yesterday, it’s more than doable.

As for the Aug. 30 $4.00 put, it finished yesterday’s trading 55 cents out of the money. If it stays above $4 for the next week, your annualized return selling a put would be 125%. Not too shabby. Should you have to buy 100 shares at expiration, your net cost would be $3.89.

Even if PTON stock went to $0 in the next week, your net loss would be $389. That’s not a massive amount for a decent-sized options account. Keep selling $4 puts with 7-14 days to expiration and continue collecting the income.

If you’re risk averse, the call is the much safer play, but aggressive investors ought to like the $4 puts.